No matter how you operate, JPS can support your business in Japan

JPS’s Japan PEO solutions allow you to operate in Japan without a local entity. But JPS also offers innovative solutions to clients who need a Japan subsidiary


JPS offers two basic PEO solutions to foreign companies doing business in Japan.

Standard Japan PEO Solution.
Under JPS’s standard Japan PEO Solution, JPS hires the employees that you need for your business in Japan and fully supports them. We arrange Japan work visas for foreign employees and handle the Japan payroll (including compliance with Japanese social insurance, labor insurance, and other benefits.)

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Hybrid Japan PEO Solution

Under a Hybrid Japan PEO, employees are hired under a PEO arrangement. At the same time, the client maintains a naked legal entity in Japan. The reasons for having this legal entity in place may include:

  • In some cases, Japanese partners or customers require that you have a legal entity in Japan.
  • For some clients, maintaining a legal entity in Japan can support a strong image for the foreign company.

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Employees in Japan are usually paid on a monthly basis. Payment on the 25th of each month is traditional but other dates can be used. Typically, employees are paid a net salary after deductions are made for (i) individual income tax (national and local tax); (ii) social insurance (consisting of a statutory retirement contribution, health insurance, and a long-term care premium); and (iii) labor insurance (consisting of workers’ accident insurance and unemployment insurance). There are both employee and employer contributions.

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Initial Employer Registrations
A Japanese company will need to make a number of corporate payroll filings. JPS’s professionals can administer this process on your behalf.

The main corporate payroll registrations are as follows:
Registration for Withholding Tax
This is a notice to the Japanese tax authorities to expect the remittance of withheld funds. Upon registration with the national and local tax offices, the new company will be assigned a number for withholding purposes.

Registration for Social Insurance
Social insurance consists mainly of health insurance, statutory retirement contribution, and long-term care insurance. Under normal circumstances, both the employer and employee contribute equally to the program.

Social insurance coverage is a critical issue from a Japanese employee viewpoint. It is vital to ensure that there is no gap in coverage. JPS can advise with respect to this issue.

Registration for Labor Insurance
Labor insurance consists of unemployment insurance and workers’ accident insurance. Contributions are made by both the employer and employee.

Companies can usually obtain labor insurance coverage for their employees in a relatively short period of time.

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Permanent Establishment (“PE”) is a tax risk that is relevant to cross border PEO. Unfortunately, it is a risk that is an often ignored by many cross border PEO service providers. Many PEO providers simply lack the technical skills and experience to protect clients in this area.

In simple terms, a PE arises when the activities of a company (or individuals) acting on behalf of a foreign company in Japan rises to the level where the foreign company itself is deemed to be doing business in Japan. As a result the sales of the foreign company are subject to Japanese corporate tax.

Being deemed to have a PE in Japan carries a number of highly adverse consequences for the foreign company. This includes:

  • The foreign company will be required to pay Japanese tax on sales attributed to the Japan PE.
  • The professional fees associated with the investigation and defense of a PE tax audit by the Japanese tax authorities will be high.
  • Often, the foreign parent will need to go through the expensive and time-consuming process of restating prior year accounts and resubmitting its prior year (foreign) tax returns.

Tax authorities around the world are pursuing PE issues far more aggressively than in the past. It is important that you work with a PEO provider who understands the issues and can help you minimize PE risk in your business structure.

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When a foreign company establishes a fully owned subsidiary in Japan (either a Kabushiki Kaisha (“KK”) or a Godo Kaisha (“GK”)) it will need to decide a tax / financial structure for Japan entity. This structure determines how the Japan entity will recognize income and be taxed in Japan.

The two basic options for this tax / financial structure are:

Cost Plus Arrangement
A Service Agreement is put in place between the fully owned Japan subsidiary and the foreign parent company. Pursuant to this agreement, the parent agrees to reimburse the Japan subsidiary for its expenses PLUS a mark-up – mark-ups of 6% or 7% are common.

Sales are made by the foreign parent company direct to Japanese customers. The foreign parent pays all of the Japan subsidiary’s expenses plus the percentage mark-up.

Buy-Sell Structure

A second alternative for the tax / finance structure of a fully owned Japan subsidiary is a Buy-Sell structure.

Under a Buy-Sell structure, the Japan subsidiary makes sales direct to customers in Japan. The Japan subsidiary’s profit is the difference between the price that goods / services are sold to the Japan subsidiary by the foreign parent and the price the Japan subsidiary sells to the customer in Japan.

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The first step for any non-Japanese person wishing to work in Japan is to qualify for a Status of Residence (“SOR”) that permits employment. SOR is the technical name for what is commonly referred to as a Japan work visa.

The typical flow of a Japanese work visa application is as follows:

Step 1: Assessment of the Japan entity. In order to obtain a Japan work visa, a Japanese business entity will be needed.
The type of entity and its structure can impact the types of visa that are available.

Step 2: Assessment of the applicant’s proposed activities, experience, and qualifications. This is done in order to determine the best available work visa category.
At this stage, it is also important to consider tax efficient compensation of employees who will be assigned to Japan. If an assignee will become the director of a Japanese company, corporate tax planning will also ne required.

Step 3: The application for a Certificate of Eligibility (“COE”) is submitted in Japan.
Once the above issues have been clarified, an application for a Certificate of Eligibility (“COE”) is prepared.

A COE is a document issued by the Japanese immigration authorities. It certifies an applicant’s eligibility to undertake specific employment in Japan.

Depending upon the situation, assessment of the COE application by the Japan immigration authorities may take six to eight weeks to complete.

Step 4: The COE is converted to a work Status of Residence (“SOR”)
This change can be done in Japan (via a change of status application) or upon arrival in Japan after obtaining a visa at a Japanese embassy or consul outside Japan.

Note that the above is designed as a general explanation only. The Japanese immigration authorities have very wide discretion and the way any particular case is handled may be different to what is described above.

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Foreign companies setting up operations in Japan will generally choose to establish a fully owned subsidiary — either a Kabushiki Kaisha (“KK”) or a Godo Kaisha (“GK”).
Kabushiki Kaisha (“KK”) is a very well-known form of doing business in Japan (the first Kabushiki Kaisha (“KK”) was established in 1873. Due to this long history, the Kabushiki Kaisha (“KK”) historically has been the most utilized form of doing business by foreign companies operating in Japan.

The law now allows single director Kabushiki Kaisha (“KK”) and also removes the previous requirement that Kabushiki Kaisha (“KK”) be established with a minimum of JPY10 million in paid in capital.

Kabushiki Kaisha (“KK”) no longer require a Japan resident director but few foreign investors would set up operations in Japan without a local director. (see further comment on this issue below.)

Godo Kaisha (“GK”) is a type of business corporation defined under Japanese law. It is similar to a U.S. LLC. Godo Kaisha (“GK”) were first allowed in 2006.

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The following are some of the most important issues that are relevant to choosing between establishing a Kabushiki Kaisha {‘KK”) or a Godo Kaisha (“GK”).

In some industries, a Kabushiki Kaisha (“KK”) may be perceived as presenting a more prestigious corporate image. While this may not be as important as it once was, there are certain industries where a Kabushiki Kaisha (“KK”) may be the best option from a commercial viewpoint. There are also certain licenses that can only be held by a Kabushiki Kaisha (“KK”). In some cases, Japanese employees may (if given the choice) prefer to work for a Kabushiki Kaisha (“KK”) .

Kabushiki Kaisha (“KK”) and Godo Kaisha (“GK”) are taxed in the same way for Japanese corporate tax purposes. Unlike a US LLC, neither Kabushiki Kaisha (“KK”) nor Godo Kaisha (“GK”) offer the option of being “disregarded” for Japanese tax purposes.
However, for US domestic tax purposes only, the US “check-the-box” regulations may allow a Godo Kaisha (“GK”) to be disregarded and effectively treated as a branch of its US shareholder. By contrast, for US tax purposes, a Kabushiki Kaisha (“KK”) is treated as a “per se” corporation. In cases that involve US shareholders, clients should consult with their US tax advisors.

Flexible Management
An important difference between Kabushiki Kaisha (“KK”) and Godo Kaisha (“GK”) is the formal management structure. In general, Godo Kaisha (“GK”) offer significantly more flexibility / simplicity in terms of management structure and operation.

Ease of incorporation
The incorporation procedures and ongoing legal compliance requirements for a Godo Kaisha (“GK”) may be simpler than those applicable to a Kabushiki Kaisha (“KK”) (though few investors would make a decision based on this factor alone.)

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It is no longer necessary to have a local director. However, if the local Japan entity will have real operations and employees the following points should be noted.

  • Incorporation will be faster / smoother if a local nominee director is used.
  • It can be very difficult to obtain Japan work visas for foreign employees if there is no local director.
  • It will be more difficult to establish bank accounts in the absence of a local director.

JPS can provide local nominee directors for both Good Kaisha (“GK”) and Kabushiki Kaisha (“KK”).

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