Japan — Hiring & Payroll Setup

When a foreign corporation hires or deploys personnel in Japan, the threshold question for tax and entity-registration purposes is whether the activity creates a permanent establishment (PE) — a taxable presence triggering corporate income tax, local corporate inhabitant tax, and enterprise tax obligations in Japan. A foreign corporation with a PE in Japan is liable for Japanese corporate taxes only on income attributable to that PE; without a PE, the foreign corporation is generally subject only to withholding tax on certain enumerated Japan-source income (dividends, interest, royalties). The PE determination therefore dictates whether the employer must register a branch, file Japanese corporate tax returns, and comply with local transfer-pricing and reporting rules.

PE categories under Japanese law

Japan's domestic tax law groups foreign corporations into categories based on the nature of their taxable presence. Permanent establishments (PEs) are defined as locations, sites, or agents of the foreign corporation falling under the following categories:

1. Fixed place of business — Foreign corporations having a certain fixed place of business such as a branch, sub-branch, business establishment, office, or factory in Japan. Fixed places used solely for preparatory or ancillary functions (such as storage, display, or delivery of goods) are excluded from the PE definition.

1. Construction, installation, assembly PE — Construction, installation, assembly projects, or supervisory services related thereto, lasting more than one year. Projects of one year or less do not constitute a PE under this category.

1. Agent PE — The foreign corporation operates through agents in Japan who meet one of the following tests:

• Agents having and frequently exercising authority to conclude business agreements on behalf of the foreign corporation; • Agents storing assets on behalf of the foreign corporation in volume or quantity corresponding to ordinary customer requirements and delivering those assets on customer request; or • Agents who regularly carry out an important portion of the work required for order acquisition, consultation, or other contract-related activities solely or primarily on behalf of the foreign corporation.

An independent agent (such as a broker acting in the ordinary course of business for multiple unrelated principals) is excluded from the agent-PE category.

Mandatory tax notification

When a foreign corporation establishes a Japanese branch or other fixed place of business (category 1 above), it must submit a tax notification to the competent district tax office within a prescribed period after establishment. Tax notification is also required when a foreign corporation generates income subject to corporate tax in Japan without establishing a registered branch — for example, through an agent PE or a construction project exceeding one year. The notification does not create the PE; the PE arises from the underlying facts. Failure to notify can result in retroactive assessment, penalties, and interest.

Treaty overlay

Where Japan has concluded a tax treaty with the foreign corporation's country of residence, the treaty definition of PE prevails to the extent it is more favorable to the taxpayer. Japan's treaties generally follow the OECD Model Tax Convention framework (Article 5), which may narrow or modify the domestic-law PE definition. Employers should confirm whether an applicable treaty provides relief — for instance, through higher time thresholds for construction PE, narrower agent-PE tests, or specific carve-outs for preparatory and auxiliary activities.

Remote work and home-office risk

A foreign corporation permitting an employee to work remotely from Japan on a sustained basis may create a fixed-place PE if the Japan location is at the disposal of the enterprise and the employee performs core (rather than preparatory or auxiliary) business functions. Relevant factors include whether the Japan-based employee has authority to conclude contracts, whether the employee performs commercially decisive activities (such as negotiating terms or finalizing pricing), and the permanence and regularity of the arrangement. The analysis is fact-specific. Many Japan tax treaties include service-PE provisions or time-based thresholds that can modify or clarify the domestic-law result.

Practical implication for cross-border hiring

If a PE is created, the foreign corporation must:

• Register with the National Tax Agency and submit tax notifications;
• File Japanese corporate tax returns on income attributed to the PE (on an arm's-length, separate-enterprise basis);
• Register for and pay corporate inhabitant tax and enterprise tax at the prefectural and municipal levels; and
• Maintain Japanese-language books and records.

Many foreign employers facing PE exposure elect to incorporate a Japanese subsidiary (Kabushiki Kaisha or Gōdō Kaisha) or engage an employer-of-record (EOR) service licensed in Japan, which employs the individual on its own payroll and invoices the foreign principal for services, thereby avoiding direct PE risk for the foreign entity.

Source: JETRO, Overview of corporate income taxes (Section 3.3)

When an employer hires an employee in Japan, immediate enrollment in the Employees' Pension Insurance (EPI, kōsei nenkin hoken, 厚生年金保険) and Employees' Health Insurance (EHI, kenkō hoken, 健康保険) system is mandatory. These two programs—collectively referred to as shakai hoken (社会保険, social insurance)—provide old-age, disability, and survivor pensions (EPI) and medical coverage (EHI) to employees and their dependents. The employer's failure to enroll an eligible employee exposes the employer to retrospective premium assessments, administrative enforcement by the Japan Pension Service (JPS), and potential criminal penalties under Japanese law.

Which workplaces must provide coverage

EPI and EHI coverage is mandatory at the following workplaces:

• Any hōjin (corporation or legal entity, including kabushiki kaisha and gōdō kaisha), regardless of the number of employees; and
• Any unincorporated company or factory employing five or more workers in a business specified by law (such as manufacturing, mining, electric power, transportation, retail, finance, or professional services).

Unincorporated workplaces engaged in certain industries—agriculture, forestry, fishing, livestock, and some service businesses—are excluded from the five-employee mandatory threshold but may elect to become covered workplaces on a voluntary basis through an agreement between the employer and the workers.

Which employees must be enrolled

An employee working at a covered workplace must be enrolled in EPI and EHI if the employee is:

• A regular employee, officer, or representative; or
• A part-time worker whose weekly work hours and monthly work days are three-fourths or more of those for regular workers in the same workplace.

Part-time workers who do not meet the three-fourths threshold are still subject to mandatory coverage if all five of the following conditions apply:

1. Weekly work hours of 20 hours or more;
2. Expected employment duration of two months or longer;
3. Monthly remuneration of ¥88,000 or more (excluding commuting allowances, bonuses, and overtime pay);
4. The worker is not a student enrolled in daytime classes under the School Education Act (excluding distance-learning, nighttime, or part-time programs); and
5. The workplace is either:

• Under one registered hōjin number expected to employ more than 50 workers for six months or longer per year; or
• A workplace with 50 or fewer workers that has elected coverage through an agreement between the employer and the workers.

The 50-employee threshold for part-time coverage was reduced from 51 employees in October 2024, expanding mandatory coverage to an estimated 900,000 additional part-time workers at mid-sized employers.

Five-day registration deadline

The employer must submit an "Application to Enroll in EPI / EHI" to the JPS branch office or processing center covering the company within five days after the employee's hire date. This single notification form enrolls the employee in both pension insurance and health insurance simultaneously. The employer must complete a separate application for each new hire.

There is no exemption from the five-day deadline for foreign nationals. All employees working in Japan on a valid work visa are subject to the same enrollment obligations as Japanese nationals, unless the employee is temporarily assigned to Japan from a country with which Japan has concluded a social security agreement and the employee holds a valid Certificate of Coverage issued by the home-country institution. Japan's totalization agreements (with the United States, United Kingdom, Germany, France, and 24 other countries) allow temporary assignees expected to work in Japan for five years or less to remain covered only by their home-country system and be exempt from Japanese EPI/EHI enrollment. For local hires or assignments exceeding five years, Japanese coverage is mandatory.

Contribution amounts and payment responsibility

EPI and EHI contributions are calculated based on the employee's standard monthly remuneration (hyōjun hōshū getsugaku, 標準報酬月額), a bracket system that assigns a grade to each employee's monthly salary and bonus. The employer and employee each pay half the total contribution for pension insurance and health insurance. The employer withholds the employee's share from monthly wages and remits the combined employer-employee contribution to the Japan Pension Service on a monthly schedule.

Health insurance premium rates are set by each prefecture and administered by the Japan Health Insurance Association (Kyōkai Kenpō) or, for larger employers, through company-established health insurance societies. Pension insurance premium rates are set nationally and adjusted periodically by the Ministry of Health, Labour and Welfare.

Registration before the first hire

If the employer is establishing a new covered workplace in Japan—for example, a foreign corporation opening its first Japanese branch or subsidiary—the employer must first submit a "Notice of Establishment of a Covered Workplace" to the JPS to obtain a workplace registration number before enrolling individual employees. The establishment notice is due within five days of the workplace becoming subject to coverage (typically, the date the first employee is hired or the date the corporation is registered, whichever creates the covered-workplace status).

Interaction with other mandatory insurance programs

In addition to EPI and EHI (shakai hoken), Japanese employers must separately enroll employees in labor insurance (rōdō hoken, 労働保険), which comprises Employment Insurance (for unemployment benefits) and Workers' Accident Compensation Insurance (for work-related injuries). These programs have distinct coverage criteria, registration procedures, and administering agencies (Hello Work for Employment Insurance; the Labour Standards Inspection Office for Workers' Accident Compensation Insurance). Employers must comply with all four programs independently; enrolling an employee in EPI/EHI does not automatically satisfy the labor-insurance enrollment obligations.

Practical compliance steps for cross-border employers

Foreign employers hiring their first employee in Japan face a multi-step compliance sequence:

1. Determine entity structure. Confirm whether the foreign entity will hire directly through a Japanese branch or subsidiary, or engage an employer-of-record (EOR) service. Only covered workplaces can enroll employees; unregistered foreign entities must register or use an EOR.
2. Register the covered workplace. If newly opening a Japanese legal entity or branch, file the Notice of Establishment of a Covered Workplace with the JPS to obtain a workplace number.
3. Enroll each employee within five days. Submit the Application to Enroll in EPI / EHI for each new hire to the JPS branch office or processing center. Late enrollment triggers retroactive premium liability dating back to the hire date.
4. Establish payroll withholding systems. Implement payroll processes that calculate the standard monthly remuneration bracket for each employee, withhold the employee's half-share of contributions, and remit combined employer-employee premiums on the JPS schedule.
5. Engage a licensed consultant. Many cross-border employers hire a shakai hoken rōmushi (社会保険労務士, certified social insurance and labor consultant) to handle the JPS filings, monthly premium calculations, and annual reporting, or contract with an EOR provider licensed in Japan to employ workers on its own payroll and invoice the foreign principal for services.

Source: Japan Pension Service, Enrollment in Employees' Pension Insurance and Employees' Health Insurance

When an employer hires an employee in Japan, Article 15(1) of the Labor Standards Act (LSA) requires the employer to "make the wages, working hours, and other working conditions explicit to the worker" at the time the labor contract is entered into. While Japanese law does not mandate execution of a formal written contract signed by both parties, the employer must deliver a written notice setting forth specific mandatory terms before the employee begins work. Failure to provide the Article 15 notice exposes the employer to administrative sanctions by the Labour Standards Inspection Office and, if the actual conditions diverge from what was disclosed, permits the worker to immediately cancel the contract and claim relocation expenses.

Mandatory items that must be disclosed in writing

Article 5 of the Ordinance for Enforcement of the Labor Standards Act (MHLW Ordinance No. 23 of 1947) specifies the working conditions that must be disclosed in writing (by delivering a physical document or, if the worker requests, by email or other electronic transmission that allows the worker to print a document). The employer must disclose in writing:

1. Period of the labor contract (indefinite or fixed-term; if fixed-term, the duration);
2. Workplace and the content of work in which the worker is to be engaged;
3. Working hours: starting hour and closing hour of work, whether there is labor to be done exceeding prescribed working hours (overtime), rest period, days off, leave, and the change in shifts (if workers work in two or more shifts);
4. Wages: methods of determination, calculation, and payment of wages (except retirement allowances and extraordinary wages such as bonuses), the dates for closing the account for wages and for payment of wages, and matters concerning wage increases;
5. Termination of employment, including resignation, retirement, dismissal, or any other cause for termination.

Additional disclosure requirements for fixed-term contracts

When hiring an employee on a fixed-term contract (有期労働契約, yūki rōdō keiyaku), the employer must also disclose in writing:

• Standards for renewing the labor contract (for example, "automatically renewed," "renewal may occur," "no renewal," or the criteria for determining whether renewal will occur); and
• Presence and content of any renewal limit (total maximum contract period or maximum number of renewals).

April 1, 2024 amendments: scope of changes in workplace and duties

Effective April 1, 2024, the LSA was amended to add two new mandatory disclosure items for all labor contracts (indefinite and fixed-term):

• Scope of changes in workplace and duties — the range of workplace locations and types of work to which the employee may be assigned in the future through transfers or job reassignments. This addresses the Japanese employment practice of broad employer authority to unilaterally transfer or reassign regular employees; the amendment requires the employer to disclose upfront the potential scope of such changes.

When concluding or renewing a fixed-term contract that triggers the five-year conversion right under Article 18 of the Labor Contracts Act (which allows an employee to convert to indefinite-term employment upon application if the total contract period with the same employer exceeds five years), the employer must also disclose:

• That the employee is able to apply for conversion to an indefinite contract; and
• The working conditions that will apply after conversion to an indefinite contract.

If the employer sets or shortens a renewal limit after the initial contract is concluded, the employer must explain the change in advance.

Electronic delivery permitted only upon worker request

By default, the notice of working conditions must be delivered as a physical paper document. The employer may deliver the notice electronically (by email, PDF attachment, or other telecommunication method) only if the worker requests electronic delivery and the method allows the worker to prepare (print) a document. The April 1, 2024 amendments clarified that electronic delivery is permissive, not automatic, and the worker controls the choice of format.

Worker's right to cancel if conditions diverge from notice

Article 15(2) of the LSA provides that "if a working condition that has been made explicit based on the provisions of the preceding paragraph diverges from the fact of the matter, the worker may immediately cancel the labor contract." If the worker cancels and has changed residence for work, the employer must bear the necessary traveling expenses for the worker to return home if the worker does so within 14 days of cancellation.

This provision is not a general breach-of-contract remedy; it is a specific statutory right allowing the worker to rescind the contract unilaterally and at once if the employer misrepresented the working conditions in the Article 15 notice.

Practical compliance for cross-border employers

Foreign corporations and their Japanese subsidiaries or branches must comply with the LSA Article 15 notice obligation for every hire, including:

• Japanese nationals;
• Foreign nationals working in Japan on a valid work visa; and
• Employees on intra-company transfer assignments, secondments, or local hires.

There is no exemption for officers, managers, or highly compensated employees; the written notice is mandatory for all workers covered by the LSA. The notice must be prepared and delivered before or at the time of hire (the date the labor contract is entered into); delivering it after the employee begins work violates the statute.

Many employers use the Ministry of Health, Labour and Welfare's model Notice of Employment (労働条件通知書, rōdō jōken tsūchisho) form, which is published in Japanese and includes an English-language version for foreign workers. The model form integrates the LSA Article 15 disclosure items and the Part-Time and Fixed-Term Employment Act Article 6 disclosure requirements (for part-time and fixed-term workers). Employers may customize the form to reflect company-specific terms, provided all mandatory items are disclosed.

Cross-border employers often combine the statutory notice with a formal written employment agreement (雇用契約書, koyō keiyakusho) signed by both parties; while the signed contract is not legally required under Japanese law, it is considered best practice for preventing labor-management disputes and provides clarity on non-statutory terms (such as probation, post-employment non-compete restrictions, and intellectual property assignment).

Enforcement and penalties

Violation of the LSA Article 15 disclosure obligation is subject to administrative guidance and corrective orders by the Labour Standards Inspection Office. Repeated or willful violations may result in referral for criminal prosecution; Article 120(1) of the LSA imposes a fine of up to ¥300,000 for violations of Article 15. The penalty applies to the employer (the corporation or unincorporated business) and, under Article 121 of the LSA, to individual officers or managers who are responsible for the violation.

In addition, the Labour Standards Inspection Office may issue a recommendation (勧告, kankoku) requiring the employer to cure the violation and submit a written corrective action plan. Employers that receive a recommendation and fail to comply may be publicly disclosed by name on the MHLW website under the "List of Enterprises Violating Labor-Related Laws" (労働関係法令違反企業名公表制度).

Source: Labor Standards Act, Article 15 (English translation) Source: Ordinance for Enforcement of the Labor Standards Act, Article 5 (English translation) Source: Ministry of Health, Labour and Welfare, Explanations of Labor-Related Laws (April 1, 2024)