Why do business in Japan?
Japan boasts the third-largest economy in the world after the USA and China and is widely regarded as among the most innovative nations in the world.
Any company in the technology field, in particular, should consider doing business in Japan. The largest stock exchange in Asia goes hand-in-hand with some of the most talented and dedicated employees in the world to yield a high potential for ROI.
It can be tricky to break into the Japanese market, but once you’ve done so, you’re likely to see results. Japan maintains a fascination with the west, considering products and services created in Europe to be exotic and reputable. If you are prepared to learn the customs and traditions associated with trading in Japan, you’ll be glad that you did so.
JST (GMT +9)
World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
23.2% (+ local taxes)
How to set up payroll in Japan
Your first approach should be to locate an office premises for your business. If you are opening a branch or wish to create a subsidiary company without being present yourself, you will also need to appoint a local representative director to the business.
This is not a legal requirement, but most local banks or property landlords will not deal with a business that has no Japanese representative in place. Under Japanese law, a limited company must have a minimum of three directors that serve for at least two years each.
Next, you’ll need to pull together any relevant articles of the incorporation (known locally as teikan) and have these notarised. This costs around ¥50,000. From here, the minimum capital required (which can be as little ¥1) can be placed in the bank account of your representative director. Here it will be held until your business is officially registered, at which point you can open a local bank account.
To achieve this registration, you’ll need to file with the Homukyoku – the Japanese equivalent of Company’s House. You’ll be asked to provide a company seal, known as an inkan, written confirmation from your three (or more) directors that they accept their duties, and pay a fee of ¥150,000 (around GBP£1,000).
You can trade with an English name, but you must include the Japanese characters 株式会社 at the beginning or end of the moniker. For example, should we wish to register a company name based on our website, we would be 株式会社UnaTerra or UnaTerra 株式会社. Either is acceptable.
Once you have your bank account opened, you can file to pay your social insurance taxes and apply for any relevant trading licenses. The whole process can take as little as four weeks, but being realistic, expect to wait three or four times this long, especially if you are making the arrangements from outside Japan.
Japanese employment law and HR considerations
Japanese employees are well protected by law, so you will need to have a good reason to attempt to terminate employment. Thankfully, this will rarely be necessary. Work is taken very seriously in Japan, and few employees would wilfully place their job at risk through act or omission.
In terms of benefits in Japan, mandatory packages are quite basic. You will need to pay social security taxes on behalf of your employee (14.45% of an annual salary for employees aged 39 or younger, 16.5% for employees aged 40 or older). Japanese employees are also entitled to between 10 and 20 days paid holiday per year. The longer an employee serves, the more vacation time they are entitled to. Your employees may need some coercing to take these holiday days.
As with all nations, income tax rates in Japan are a sliding scale based on gross annual salary. These income tax rates are:
- Salary of ¥0 – 1.94 million – 5%
- Salary of ¥1.95 to ¥3.2 million –10%
- Salary of ¥3.3 to ¥6.94 million –20%
- Salary of ¥6.95 to ¥8.9 million –23%
- Salary of ¥9 to ¥17.9 million – 33%
- Salary of ¥18 to ¥39.9 million – 40%
- Salary of ¥40 million or higher – 45%
As an employer, you will need to withhold income tax from a salary at source and pay this annual. If an employee earns a salary of ¥20 million or more, they will also need to file a personal tax return. However, Japan does not have a national set tax year. You can set your own based on the financial year of your parent company or the anniversary of the founding of your business.
Setting up a subsidiary entity in Japan
Until 2006 setting up a subsidiary entity in Japan was a lengthy, expensive process with limited reward. The minimum capital investment was ¥10 million, and the administration took forever. As a result, most international businesses opted instead to open a branch.
2006 was the introduction of the Corporation Law or Companies Act in Japan, which made it much easier to set up a limited company. As a result, most new businesses are set up as a Kabushiki Kaisha, or KK – the equivalent of the limited company in the UK.
It should be noted that a KK has the highest level of corporate taxes levelled in Japan, at 23.2% of gross turnover plus local taxes. This is considered the most trustworthy and reputable form of business in Japan, though. As reputation is critical in this nation, that is not a status to take lightly. Talented employees are likelier to be attracted to a KK than any other business structure.
A KK will also not be subject to double-taxation laws, and all liabilities – legal or financial – begin and end with the KK, not a parent company. A KK is the sole domain of its directors, meaning that you will have complete control over any decisions. Typically, a deciding vote on major decisions will lie with the director that has the highest personal stake in the company.
Choose your directors carefully, though. Negligence or legal misdeeds from one director can lead to action against all, even if they were not involved. If one director makes a bad deal without consulting others, for example, there is no reneging on the agreement. Directors are also expected to hold a position for two years at a time. Terminating a director position can involve a costly buy-out.
Japanese nationals are fiercely proud of their culture and traditions, so if you are going to be successfully trade in this country, you must learn how to impress your hosts. Honour and respect are critical in Japan. If you inadvertently offend a business partner, the repercussions can be significant.
Firstly, do not take business dealings lightly. Expect to deal with people of equivalent rank, do not attempt to make small talk (in Japan, time is money), and be prepared to be asked deeply personal questions about your education, home life and financial status. This may jar with western values, but it’s par for the course in Japan. Evasiveness on the grounds of privacy will make you appear untrustworthy.
In Japan, verbal agreements are more popular than putting things in writing. Do not pressure a Japanese associate into signing a contract or even confirming a conversation in an email or letter. This will be seen as questioning the integrity of your potential business partner; a strict cultural no-no.
Never talk business without first handing over your business card and bowing. You should also offer a gift to all parties that attend a negotiation, but never present the same gift to two people of unequal rank. If you are offered a gift in return, refuse twice with thanks and then accept it. This shows humility without causing offence. Open the gift in private – a Japanese national would be mortified if they feel that you do not enjoy their gift.
Greetings and manners are also important in Japan. Greet partners with a bow, rather than a handshake. Close physical contact with strangers can make Japanese nationals very uncomfortable. Bow lower to people of a higher status to demonstrate respect, and never use first names without invitation. Use surnames followed by -san. For example, John Smith would be addressed as Smith san. Once you have established a rapport, you may be invited to address this gentleman as John.
Above all, be unstintingly polite, serious and genuine. Never be late, as tardiness is seen as a huge sign of disrespect. Thank your business partners for their time and hospitality, praising them for their choice of meeting venue (especially if they welcome you into their home). Ask after the welfare of the family of your counterparts and try not to be too direct. Rather than saying, “no” outright, for example, say, “I will consider this.”
Remain claim, maintain a poker face, do not talk with your hands and do not try to lighten the mood with a joke. In Japan, laughter in a business meeting usually means your counterparts are uncomfortable, not that they want to hit the karaoke bar with you after the meeting as you seem fun. If you are invited to such a venue, you must sing! Don’t panic, you will not be expected to have the voice of an angel. This just shows your business partners that you respect their customs.
Finally, consider how you dress carefully. In Japan, anything associated with death is to be avoided. This means no black suits with black ties – that is funeral attire. If you are wearing a black suit, wear a pale-coloured tie – or, better yet, stick with navy blue.
Setting up in Japan FAQs
It takes quite some time to set up an entity in Japan, so patience will be required. Expect to wait around 16 weeks before your business is fully ready to trade, though you could start the recruitment process after around 12 weeks.
There are three primary business structures in operation in Japan:
• A branch of an existing overseas business (either with or without a trading office located in Japan)
• A limited liability partnership between two or more individuals (LLP)
• A private subsidiary entity – either a Kabushiki Kaisha (KK) or Godo Kaisha (LLC)
KK is by far the most popular and reputable business model in Japan.
Japan introduced a National Pension System in 1959, and all residents of the country aged between 20 and 59 must pay into this fund. As an employer, you will also contribute as part of your social security tax repayments. You may also offer a private supplementary pension, as many Japanese nationals consider the government-sanctioned pension to be low in value.
Japan offers tax relief to any business that invests in a start-up. A business that invests at least ¥100 million in a large company, or ¥10 million in an SME, can deduct 25% of their investment from their tax return. Also, businesses that can prove they are investing in eco-friendly green technology can deduct 5-10% from their taxes, depending on the level of sustainability they practice.
A Business Manager visa is a permit for non-Japanese nationals that want to start a business in the country or join an existing company in a senior management role. This means that the Business Manager visa allows a foreign national to open a new KK or LLC in Japan.
Social security contributions in Japan are divided into five categories:
• Health Insurance
• Nursing Care Insurance
• Employment Insurance
• Welfare Insurance
• Pension Insurance
Employees and employers alike contribute to these social security plans, with the contributions rising once an employee reaches the age of 40.
For employees under the age of 40, contributions total 14.45% of an annual salary for employers and employees alike. Once an employee reaches 40, these contributions rise to 16.5% each.
Probationary periods in Japan usually last between three and six months. They cannot exceed one year in length. Even if an employee does not impress during their probationary period, you will still need a good reason and evidence to terminate the contract. An employee on probation enjoys the same protection as an established team member in Japan.
Multiply an employee’s salary by 1.246 times to estimate the total cost of a new hire in Japan.
You’ll only need to invest ¥1 as a token gesture to open a KK in Japan if you have a resident director, though some experts recommended a minimum of ¥1 million (about GBP£6,000) to cover initial expenses. If are moving to Japan to establish a business as a sole director holding a Business Manager visa, or wish to sponsor an overseas employee on a working visa, you’ll need to invest ¥5 million (roughly £GBP 30,000).
Yes, you will need a local bank account registered in the name of your company to do business in Japan as a KK. If you are opening an LLC you can handle your finances from an overseas bank account, but you’ll need a representative office in Japan.
Officially, Japan operates a working week of 40 hours, spread over four or five days. If a business expects its employers to work longer, they are – in principle – legally obliged to obtain government permission under the Japanese Labour Standards Act No. 36. In reality, most employees in Japan regularly work up to 80 hours per week – invariably not receiving overtime remuneration for these extra efforts.
A superior private pension is a popular optional benefit in Japan. The national pension is often regarded as offering substandard pay-outs, leading to an increasing number of Japanese nationals working past retirement age. If you can make this unnecessary, you’ll be an appealing employer. Support for family care needs and any mental health difficulties are also popular supplementary benefits.
No, Japanese employment law is weighted heavily in favour of employees. If you wish to terminate a contract, build a watertight case and seek advice from a legal professional.
If an employee claims wrongful dismissal against your business, they can be reinstated by a third party. The employee will be owed any backdated salary they lost out on during their time away from your company – not to mention the inevitable awkwardness!
There is no legally defined severance pay package for terminated employees in Japan. This depends on the terms of the contract. Usually, though, a business is expected to give at least 30 days of notice.
Japanese employees are entitled to anywhere from 10 to 20 paid holiday days per year. The length of service of the employee dictates how many days they receive. Getting employees to take these holidays is often a challenge, but that’s another story.
Japan also observes 16 public holidays each year. Legally, a business is not obliged to pay employees for these non-working days. Most do so, however, so it’s is advisable to factor this in your budgeting.
You will be welcome to open a branch of your business in Japan, but it can be a logistical and bureaucratic headache – though, thankfully, the UK and Japan do enjoy a double-tax treaty. In the past, businesses chose the branch model as opening a subsidiary company required high levels of investment and a branch was more cost-effective. As a KK can now be opened for as little as ¥1, this is a much easier process and offers greater flexibility.
As payroll in Japan can be complicated, outsourcing is advisable. Bringing in a business to manage all matters related to payroll and tax will require an outlay, but it will minimise the risk of any mistakes being made that leads to disgruntled employees. You’re welcome to manage your payroll in-house, but the time to learn the nuances of Japanese payroll before attempting this.
The previously discussed Business Manager visa is the most popular work permit for overseas nationals looking to open a business in Japan. However, there are two popular forms of visa for employees:
• The Japan Work Visa, a standard visa that can be issued from anywhere from 3 months to 5 years. A Japan Work Visa will only be issued to individuals with an offer on the table from an employee.
• The Japan Highly Skilled Professional Visa, which is limited to particular professions and allocated on a points system based on experience, education, age and salary. A Japan Highly Skilled Professional Visa usually lasts for 5 years, but if an application scores 80 points or more during the application process, residency can be applied for within a year.