Japan at a Glance

It’s not compulsory but is common. Typically, it’s three to six months and should not exceed one year. An employee can be terminated during or at the end of the probationary period, only if the termination is objectively reasonable and socially acceptable. Although this test is somewhat easier to meet for probationary employees, it may still be difficult to justify the termination.

It is not allowed to extend a probationary period unless the reasons and duration of the extension are clearly stated in the work rules or employment contract and deemed reasonable.

Overtime is capped at 45 hours a month and 360 hours a year. If there is a temporary surge, the annual limit may be increased to 720 hours, subject to a monthly maximum of 80 hours (averaged over a period of consecutive two, three, four, five, and six months) and an absolute maximum of 100 hours a month.

The overtime pay rates are as follows:

• 125% of regular hourly salary for hours worked over 40 but below 60 hours per week
• 150% of regular hourly salary for hours worked over 60 hours per week

High-level professionals can be exempted from overtime allowance, holiday work and late-night work compensation requirements by agreement subject to certain formalities (labor management committee resolution, filing with the authorities and individual consent). To qualify, the employee must earn at least JPY 10.75 million a year and be engaged in clearly defined work requiring specific skills. These employees must take not less than 104 days off a year and will be subject to other measures to secure their well-being and good health, including health checks for those working in excess of certain working hours.

Overtime Rates

For non-exempt employees, the maximum work hours are 40 hours a week, eight hours a day.

In order for the employer to order overtime work, a labour-management agreement (36 Agreement) that provides for the maximum overtime work to be performed must be concluded with the union or the employee representative and submitted to the respective labour standards inspection office. For overtime work, minimum rates of overtime must be paid as follows:

• Overtime work up to 60 hours per month: 25% of the hourly base pay.
• Overtime work exceeding 60 hours per month: 50% of the hourly base pay.
• Late night pay (work performed between 10PM and 5AM): 25% of the hourly base pay.

Holiday pay (work performed on the legal holiday): 35% of the hourly base pay

The termination process can be exceedingly difficult. An employee can only be dismissed if the employer has objectively reasonable grounds to do so, and the dismissal would not be considered unreasonable in general societal terms. Poor performance or misconduct that justifies termination in other countries often does not warrant in Japan. A termination that is not justified will be deemed as an abuse of the employer’s termination rights. Such termination is a nullity, and the employee will be reinstated with back pay if the employee seeks such relief. Due to difficulties associated with terminating employees, employers are increasingly hiring employees for fixed terms of employment. Fixed-term agreements are generally required to be for three years or less.

For employees, 30 days or as otherwise detailed in an employment contract. Employers must give at least 30 days’ notice of dismissal or provide payment in lieu of notice. However, due to the difficulty in justifying a termination, many employers offer severance agreements and pay some consideration in exchange for the employee’s voluntary resignation and waiver of claims against the employer. (Note: The 30-day notice period does not apply to employees that are terminated during the first 14 days of the probationary period.)

For both Kabushiki Kaisha (KK) and Goudou Kaisha (GK), there is no legal minimum for paid-up share capital. However, it is common practice to have at least JPY 1 as the capital investment. Debt/equity rules may apply depending on the specific business license held by the company. These rules are generally aimed at ensuring proper financial structure and compliance with tax and regulatory authorities.

For a Kabushiki Kaisha (KK), at least one director is required, and this director must be a local resident of Japan. On the other hand, a Goudou Kaisha (GK) only requires a minimum of one member, which can be either an individual or a corporation, and this member does not need to be a resident of Japan.

In both Kabushiki Kaisha (KK) and Goudou Kaisha (GK), the minimum number of shareholders is one. This makes it easier for small businesses or individual entrepreneurs to establish a legal entity.

It is required that a representative of the company be a resident of Japan. This individual acts as the administrator and handles various administrative tasks associated with the business.

While Japan does not have a specific insurance requirement at the moment of incorporation, businesses are typically expected to secure insurance related to employee welfare and workplace safety. Common insurance types include:

• Worker’s Accident Compensation Insurance
• Health Insurance
• Pension Insurance

Although a physical office is not strictly required for business registration, certain conditions must be met for the entity to be considered operational. Virtual offices or shared office spaces can be used as business addresses. However, it’s worth noting that challenges may arise when dealing with administrative processes or opening a bank account if the company is registered under a virtual office or shared office arrangement.

Profits from a Japanese entity can be repatriated to the home country or to another jurisdiction, subject to Japanese tax regulations. Companies must adhere to local rules governing the distribution of dividends or the transfer of funds, including any applicable taxes.

Japan does not prescribe a specific transfer pricing methodology. Instead, it follows the “best method” rule, allowing companies to choose an appropriate transfer pricing method based on their circumstances. The National Tax Agency (NTA) released guidance in 2017 to help businesses determine the best transfer pricing method, and taxpayers can approach the NTA for advice if needed.

While not obligatory, e-invoices are an option for companies. However, for companies that wish to claim consumption tax (input tax), specific criteria must be met in the invoice.

A company’s fiscal year is typically determined at the time of registration, and while December 31st is a common fiscal year-end, it is not mandatory.

The deadlines for tax filings are as follows:

• Corporate Tax Returns: Due two months after the fiscal year-end (without extension).
• Consumption Tax Return: Also due two months after the fiscal year-end for companies subject to consumption tax.
• Depreciable Asset Tax Return: Due by the end of January, irrespective of the fiscal year-end.
• Withholding Tax Return (Hoteichosho): Due by the end of January, regardless of the fiscal year-end.

In addition to filing corporate tax returns, companies must also fulfill several other tax obligations, including:

• Interim Corporate Tax Payments (if applicable)
• Consumption Tax Returns (for C-Tax Payers)
• Depreciable Asset Tax Returns
• Fixed Asset Tax Payments (as notified by the tax office)

Withholding Tax Returns (Hoteichosho)

For foreign companies operating in Japan, it is mandatory to appoint a Certified Public Tax Accountant (税理士) to handle all matters related to tax compliance and dealings with the Japanese tax authorities. This ensures that the company remains in good standing with the tax office.

Japan operates a progressive tax system where your tax rate increases with your income. At present, the following tax brackets apply:

For example, a single taxpayer with a taxable income of ¥8 million would fall in the 23% tax bracket and pay ¥1.204 million in taxes (¥8M x 23% = ¥1.84M – ¥0.636M = ¥1.204M).

Japanese local governments (prefectural and municipal governments) levy local inhabitant’s tax on a taxpayer’s prior year income, collectively known as Residence Tax or Inhabitant Tax (jumin-zei). In total, this amounts to 10% (6% prefectural and 4% municipal) of your prior year’s taxable income. This applies when the taxpayer is a resident of Japan, as of January 1st of the current year. For local inhabitant’s tax purposes, an equalization per capita tax is also assessed. The standard annual amount is JPY 5,000, while this may vary based on the prefecture/municipality in which the taxpayer resides. Local inhabitant’s tax is not deductible

A non-resident taxpayer’s Japan-source compensation (employment income) is subject to a flat 20.42% national income tax on gross compensation with no deductions available. This rate includes 2.1% of the surtax described above (20% x 102.1% = 20.42%). A non-resident taxpayer may be subject to the local inhabitant’s tax at a rate of 10% if they are registered as a resident as of January 1st of the current year.

Earned income deduction: A resident taxpayer who earns income from employment is eligible for an earned income deduction for purposes of both national income and local inhabitant’s tax. The amount of the deduction is based on the amount of the employment income and is determined by reference to a deduction table.

Personal deductions: Interest is not tax deductible. Japanese social security contributions are fully deductible. Medical expenses (irrespective of where they were paid) are tax deductible, with certain limitations.

Charitable contributions: Those designated by the Ministry of Finance in Japan are tax deductible, with certain limitations. Qualified contributions or donations that total, in aggregate, over JPY 2,000 are deductible in computing the national tax. The total deduction is limited to 40% of income, less than JPY 2,000. The definition of a qualified contribution is extremely restrictive (see Other tax credits and incentives section for more information).

Life insurance premiums (or private pension): Premiums paid to a Japanese agency in local currency are deductible to a limited extent in computing national and local inhabitants taxes.

Earthquake insurance premiums: Deductible for the purpose of both national and local inhabitant’s tax to a limited extent.

Mortgage deductions: Mortgage interest is not tax deductible. However, a tax credit on housing loans may be available for up to ten years when certain conditions are met. The total amount of tax credit is determined by the year in which the taxpayer began to reside in the property as well as mortgage balance at the end of the tax year.

Personal deduction: Resident taxpayers are entitled to a personal exemption (JPY 380,000 for national income tax purposes and JPY 330,000 for local inhabitant’s tax purposes) for themselves and their dependent spouses.

Business deductions: Business expenses are tax deductible in some limited cases. An employer’s reimbursements of business expenses, such as moving, travel, and entertainment expenses, do not constitute taxable income to the employee, provided that the expenses are required for the employer’s business.

Withholding income tax at source:

Employers who pay income subjected to withholding at source must pay the taxation office the amount of tax withheld at source no later than the 10th day of the month following the month that the income was paid. Regarding paying withholding tax on residents’ salaries, a special measure is provided for small businesses with fewer than 10 persons on the payroll that allows them to pay withholding income tax in six-month instalments, or twice a year (by July 10th and by January 20th), at some professional fees.

Year end adjustment on employee withheld income tax:

The year-end adjustment is for the calculation of the income tax done by the employer. During the year, employee tax is withheld each month from employee salary based on the rates published by the tax office. At the end of the year, the exact tax liability of the employee is calculated based on his/her special situation (such as number of dependents), and an adjustment is made so that the total amount of tax withheld during the year equals the tax liability of the employee. The amount of tax withheld from employees is reported annually in the withholding tax report “Gokeihyo” filed in January.

Payroll Tax Obligations

There are also payroll tax obligations in Japan, which include withholding taxes on employees’ income and other local taxes.

1. Payroll Withholding Income Tax: This is a tax on employees’ earnings that the employer must withhold and remit to the tax authorities.
2. Inhabitant Tax (Resident Tax): This is a local tax on individuals, and the company is responsible for withholding this tax from employees’ salaries.

Deadlines for Payroll Tax Submissions

Payroll tax submissions have specific deadlines:

• Payroll Withholding Income Tax: This tax must be paid by the 10th of the following month. Companies with fewer than 10 employees can apply for bi-annual payments, which are due on July 10th and January 20th.
• Inhabitant Tax (Resident Tax): This tax must also be paid by the 10th of the following month.

All residents contribute to pension insurance. This premium is revised every September and is determined by factors such as price fluctuation and real wage index. Salaried workers under the age of 70 pay a percentage of their standard salary. The premium for salaried workers is 18.30%, paid half by the employer and half by the employee.

Pension benefit is paid once the insured person is 65, unemployed, and have paid pension premiums for at least 10 years. The benefit amount depends on one’s total contribution.

Non-Japanese workers who have lived and worked in Japan for less than 10 years may apply to claim a lump sum payback on their national pension when they leave Japan and no longer will be eligible to receive Japanese pension benefits. However, this only applies for those who have been covered by employees’ pension insurance for at least six months. The application must be sent within two years after leaving Japan.

Employers pay a child allowance premium (0.36%) along with the pension premium. This premium funds the government program that provides childcare allowance to residents with children.

Health insurance provides medical coverage for all insured residents, and long-term care insurance provides elderly care benefits. It also provides allowances in cases of childbirth, injury, sickness and death. National Health Insurance insures non-salaried residents under the age of 75. Employees’ Health Insurance covers salaried workers under 75 and their dependents under 75. Both non-salaried and salaried persons become insured under Latter-Stage Elderly Healthcare System upon turning 75.

National Health and Employees’ Health insurances cover 70% of medical expenses for persons under 70, and for those who are 70 to 74 with a standard salary of JPY 280,000 or more. Otherwise, the government covers 80% of medical expenses for those who are 70 to 74 with a standard salary below JPY 280,000 and 90% for those over 75. If total monthly medical costs of a household exceed a maximum amount, the exceeded amount will be reimbursed. The maximum is determined by the insured person’s compensation and age.

Like pension, Employees’ Health insurance premiums are calculated based on standard salary. The percentage depends on the employer’s registered prefecture. Tokyo’s rate is 9.85%, paid half by employer and half by the employee. Persons ages 40 to 64 are subject to an additional 1.62% premium on top of their health premium for long term care insurance, with the employer and employee each paying half.

Children’s Support Contribution

This new system is based on the principle of social solidarity and is designed as a mechanism for all generations and all sectors of society to share the responsibility of supporting children and child-rearing households. Health Insurance Societies will begin collecting the Child and Childcare Support Contribution together with health insurance premiums and long-term care insurance premiums (for insured persons aged 40 to under 65).

Unemployment insurance provides unemployment allowance, as well as childcare and family care leave allowances.

The length of receiving unemployment allowance depends on age, termination reason, and period which one has paid unemployment insurance premiums. The waiting period for the first allowance payment is four weeks if the company has terminated the employee, as opposed to a waiting period of up to three months if the employee quits on his own accord. Allowance is paid monthly from thereon provided the person can prove that he/she is actively searching for a job.

Representative directors are not eligible for this insurance, as they are not under an employment agreement but are under a service contract. Directors on the Board of Directors are also not eligible, but directors who simultaneously function as an employee (usually a high-ranking employee with a title such as department head) are eligible.

The premium rate differs according to the employer’s industry type, and the employer pays a larger percentage than the employee. For example, if an employer is in a general industry type, meaning the employer is not of agriculture, forestry, fishery, sake production or construction industries, the employer will pay a 0.85% premium and the employee 0.50%.

Worker’s accident compensation insurance provides medical care allowance for work and commuting related injuries, diseases and deaths, as well as compensation allowance for unpaid medical leave period that exceeds four days.

The same rule applies for directors as with unemployment insurance, but there are two ways in which representative directors and directors may become eligible. One way is to apply for Special Enrolment, which has several requirements such as industry type and number of employees. The second way is to receive unemployment insurance eligibility as a director who simultaneously functions as an employee. Representative directors are not eligible for unemployment insurance and therefore not applicable for this second method.

Premiums are covered by the employer. The rate depends on the employer’s industry type, and can vary from 0.25% to 10.3%. Common industry types are finance, insurance and real estate (0.25%), warehousing and security (0.7%), and wholesale/retail trade, restaurant, and lodging (0.4%).

Employers pay an additional 0.002% premium for asbestos insurance, which funds asbestos health damage relief.

While most employers register with public health insurance, alternative health unions exist for particular industries (employer will opt out of the standard Health Insurance scheme). Premiums are usually cheaper, and the benefits are at a higher level than the standard scheme). Employers can enroll if certain requirements are met.

Employers can also enroll in a pension fund, which insures employees with increased pension benefits upon reaching pensionable age.

401K: Most employers simply use the government pension scheme, but some multi-national companies will employ an equivalent of a 401K plan in Japan, managed by a third party. The employer would set the thresholds and matching scheme and engage a third party. Typically, there are minimum headcounts required to employ such a plan in Japan.

Most of the smaller MNC employers do not provide supplemental insurances since the standard insurances cover most items. However, some larger MNCs do provide life insurance/top up insurance and travel insurance. Directors and Officers Liability (D&O) Insurance is common as well for senior executives.

Severance Pay is not a statutory requirement, but most MNCs will pay some sort of severance in a termination exercise. The typical amount is one month for every year of service, plus 30 days’ notice or 30 days payment in lieu. Sometimes, there will also be a buyout of leave, and the company may pay the severance in the form of a retirement allowance which has significant tax benefits to the individual, if the individual has stayed a long time with the company.

Wages must be paid to the workers in currency, directly, in full, at least once a month, and on a fixed date. It’s common to pay between the 25th – 31st of the month for current month salary. If salary is paid in arrears, it’s usually by the 10th of the following month.

Online, pdf or paper.

Pursuant to the Labor Standards Law, the following records must be maintained at each workplace for three years:

• a wage ledger, showing paid amounts and the basis of calculation (including hours worked);
• a workers’ roster; and
• other related documents on hiring and compensation.

The maximum work day is six days a week, and employers are obligated to give a minimum of one holiday a week. This one-day holiday does not need to be any particular date, and it is not mandatory to give public holidays as company holidays. However, it is common practice to give two company holidays a week (usually, Saturdays and Sundays) plus public holidays if such holidays fall on weekdays. Japan has around 16 national holidays each year. In addition, most companies are closed from December 29th to January 3rd even though only Jan 1st is a national holiday. Many Japanese companies are also closed for up to one week in August for Obon holidays.

Newly-hired employees are generally granted 10 days’ paid annual leave after the completion of six months’ service. The entitlement rises by one day a year for the following two years and by two days a year thereafter, up to a maximum of 20 days. Unused leave expires after two years and cannot be carried over unless the contract says otherwise. Employers are not required to pay out unused annual leave in case of termination, but it can become a part of the negotiation on leaving the company.

Under Japan’s labour laws, all full-time employees are guaranteed the minimum 10 days of paid annual leave per year after serving an initial six months of employment, irrespective of race or gender, and were present for at least 80% of the hours they were supposed to be working. It is mandatory to Employees to utilize atleast 5 days of paid annual leave within the year and carried over the unused paid annual leave to the following year.

The statutory minimum number of paid vacation days per year, in addition to the company holidays, are:

Usually, the full entitlement of annual leave for a given year is granted (received) on either the annual anniversary of employment, or on a standard day each year that applies to all employees.

Following the entry into force of the special rules applicable to willing high-level professionals on April 1st, 2019, qualifying employees will have to take holidays of no less than 104 days per year and no less than four days every four weeks. Their employers must grant them at least one holiday (two weeks in a row) every year and other prescribed health support.

In general, there is no sick leave rights in Japan. When employees get sick, they use their paid vacation to take leave of absence. Some foreign companies grant sick leave to their employees as a special benefit. There is no requirement to grant sick leave unless the work rules or employment contract stated otherwise. Employees who are absent from work due to non-work related sickness or injury are not entitled to pay from their employer.

Employees are covered by workers’ accident insurance in the cases of injury, illness, disability or death resulting from employment. In the case of work-related accidents, there are a number of benefits available.

Under employees’ health insurance coverage, employees are entitled to two-thirds of the applicable standard wage (calculated according to a specific formula) as illness/injury allowance after three days of absence for 18 months. However, if the employer offers the employee any wages during this period, the allowance will be reduced by the amount received.

Dismissal is rarely an immediate option, and work rules often include a suspension period (e.g., from three to six months) during which the employee needs not perform his/her duties but maintains a contractual relationship with the employer. If the employee recovers during this period and can return to work, he/she will be reinstated. If the employee does not recover within this period, the employer can give notice of termination. Various rules can be adopted in this respect, and the duration and reasons for suspension will vary.

Before birth: Maternity leave of six weeks before childbirth (or within fourteen weeks in the case of two or more expected children) must be granted to expecting mothers.

After birth: Employees cannot work before eight weeks have passed since childbirth. However, once six weeks has passed since childbirth, an employee can submit a request to work, and the employer can allow her to perform duties that are approved by a doctor.

It is not mandatory to pay an employee during maternity leave. If no wages are paid, the employee is paid two-thirds of her base wage for up to 14 weeks from her health insurance. If paid from health insurance, this allowance is non-taxable.

Employers are prohibited by the Act on Equal Opportunity and Treatment between Men and Women in Employment from treating a female employee disadvantageously because of maternity leave. Therefore, employees can resume the same job on the same working conditions after maternity leave.

Male employees are entitled to 4 weeks of flexible paternity leave. This leave can be taken within the first 8 weeks after childbirth, and applications to the Employer must be submitted at least 2 weeks in advance. Wages are paid by social security at the same rate as maternity leave (two-thirds of base wage).

The new regulation creates an environment to make it acceptable for working fathers to take paternity leave.

An employee that is raising a child (biological or adopted) that is less than one year old and is willing to continue to work after child care leave must be allowed to take parental leave until the child reaches one year of age.

If both the father and mother take child care leave, the leave period is extended until the child reaches one year and two months.

The leave period may be extended until the child reaches two years if:

-The employee wants to register with daycare but is unable to, or

-The employee’s spouse that was looking after the child and was planning to continue to do so after the child turns one year old cannot do so due to their death, injury or illness.

It is not mandatory to pay the employee during child care leave. If no wages are paid or only a partial wage below 80% of base wage is paid, the employee will be paid from half to two-thirds of their base wage from their unemployment insurance.

Child care leave can be taken on an hourly basis, but if taken on an hourly basis, the hourly leave must commence from the employee’s usual daily start time or end at the daily finish time.

Employees who work for four hours or less per day are also entitled to take child care leave on an hourly basis.

Child care leave is entitled to all employees, including employees who have not fulfilled 1 continuous year of service However, employees on fixed-term contracts must complete at least one year of continuous service to be entitled.

Employees who take childcare leave are exempted from social insurance premiums on the month when childcare leave starts, if the leave is >14 days in the same month.

It is not mandatory to pay the employee during nursing care leave. If no wages are paid or only a partial wage below 80% of base wage is paid, the employee is paid 40-80% of the base pay from their unemployment insurance.

Nursing care leave can be taken on an hourly basis, but if taken on an hourly basis, the hourly leave must commence from the employee’s usual daily start time or end at the daily finish time. Employees who work for four hours or less per day are also entitled to take child care leave on an hourly basis.

It is common to give leave for marriage, death of a relative, etc., and these would be defined in the Rules of Employment.

Employer statutory benefit contributions are approximately 15% of the salary and taxable allowances.

Annual Health Check Benefit

Employees registered (over 35 years old) under the social insurance general system “Kyokai Kempo” are entitled to receive benefit for an annual physical check up at any hospitals designated by “Kyokai-kempo” 協会けんぽ. The company will cover the cost of basic medical checkups for all employees. Any advanced or additional medical checkups required will be the responsibility of the individual employee.

Statutory Industrial Doctor

Under the Industrial Safety and Health Law, workplaces that employ 50 or more workers must appoint an Industrial Doctor (also known as occupational physician) to conduct health management including:

On-site health checkups

Interview guidance for workers who work long hours

Stress checks (once a year) and interview guidance for highly stressed workers

Health education, health counseling, and other measures to maintain and promote workers’ health

Maintenance and management of work environment and work management to maintain workers’ health

Investigation of worker health problems and measures for prevent ion

On top of salary, companies usually pay transportation fees for employees from their residence to their working place on. This commutation allowance, which is generally the cost of a monthly train pass, is usually subject to a cap and is a non-taxable allowance for the employee. Any other allowance paid on top of base salary is subject to income tax.

Accommodations

Specific neighbourhoods in Tokyo are comfortable and foreigner-friendly, making them popular among expats. These neighbourhoods are Minato-ku (Aoyama, Azabu, Roppongi and Shirokane), Meguro-ku (Nakameguro and Jiyugaoka), and Shibuya-ku (Hiroo, Daikanyama and Ebisu). In Yokohama, the popular area is Naka-ku. There are many international schools, shops and restaurants with English-speaking staff. Expats can decide on the best place to live based on where they work, access to school for their children and the type of lifestyle they lead.

Transportation

Whether traveling near or far, the vast network of Japanese public transportation, especially train and shinkansen, provides a fast and efficient way of reaching your destination.

Food

Dining in Tokyo or any of Japan’s large cities will give you an unforgettable experience. In addition to the wide selection of Japanese food, you can find world-class international cuisine, with a particularly good selection of Chinese, Italian, French and Indian restaurants.

Tokyo is known for having retained its position as the city with the most Michelin-starred restaurants in the world for 12 years in a row.