How do you set up a business in Japan? Payroll, HR and entering the Japanese market

Updated on 12 April 2024

As the third-largest economy in the world, it’s hardly a surprise that Japan is considered a nation with plenty of opportunities for trading and business expansion.

Quick, easy, no commitment!

This country is also famously innovative and forward-thinking, often producing bleeding-edge technology, and boasts a dedicated and talented local workforce.

Video: Understanding international payroll

Does Japan welcome overseas businesses?

Japan operates a pretty simple policy in the realm of business. If you have an idea that will generate income and improve the life of the nation’s citizens, you’ll be welcome to trade, regardless of your passport. Just keep in mind that competition is fierce in the Japanese business landscape, so ensure you have a watertight business plan that will suitably dazzle the local authorities.

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What industries are most popular in Japan?

When many of us think of Japan, the latest and greatest consumer gadgets and electronics come to mind. Technology is undeniably a principal industry in Japan, but other popular business sectors include:

  • Real estate
  • Financial advice and services
  • Fashion
  • Education
  • Chemical and energy engineering
  • Education

Any of these industries can provide a lucrative opportunity to trade in Japan.

Is it easy to set up a business in Japan?

It can be quite time-consuming to set up a business in Japan, and it may be advisable to seek help from a local to guide you through the process. The steps are as follows:

How to set up a business in Japan

  1. Decide if you wish to open your business from overseas or within Japan

    If the latter, apply for a business visa

  2. Decide upon your business structure

    Kabushiki-Kaisha is the most popular and can be opened from outside Japan

  3. Locate a business address in Japan

    Whether you live in the country or not, this is mandatory

  4. Name your company

    You can use a westernised name, but the Japanese translation must also appear before or after

  5. Obtain your teikan – articles of association

    Which include a company seal (inkan). This is the most challenging and lengthy part of the process and where you will likely need local assistance

  6. Register your company

    With the Homukyoku, Japan’s equivalent of Companies House

  7. Register to pay taxes

    With the Kokuzei-chō, or National Tax Agency of Japan

  8. Register for social security contributions

    With the Kōrō-shō, or Ministry of Health, Labour and Welfare of Japan

  9. Open a Japanese bank account

    You will need a domestic business bank account in order to easily trade in Japan

Can I run a business in Japan while living overseas?

You do not need to be a resident of Japan to start a business in the country – you just need a registered address in Japan and a local bank account

However, you can apply for a business visa to remain in Japan to run your company if you prefer. You’ll need to invest ¥5,000,000 (around £30,250) into your company as part of the application process.

Cultural considerations when running a business in Japan

When looking to trade with Japanese business partners, you’ll need to negotiate some prominent cultural differences between east and west. Here are some insights into Japanese business etiquette to keep in mind

  • While most western associates will be met with a handshake rather than a bow, understand bowing etiquette. A bow should reflect the age and authority of the person you greet. The more senior the individual, the lower you should bow. Do not hold eye contact while you do so, as this is considered aggressive.
  • Respect hierarchy in Japan, always addressing the most senior person first, then working the room according to rank.
  • Dress conservatively, but avoid black where possible, especially with a dark shirt and tie – black formalwear is mainly reserved for funerals in Japan, and any reminder of death is considered bad luck. A navy blue suit or dress is safer.
  • Where possible, arrange for a third party to introduce you to a potential associate. Strolling up to a stranger and introducing yourself, then pitching a partnership, is not the done thing in Japan.
  • Exchanging business cards before a meeting is a ritual in Japan, known as meishi koukan. If you turn up without business cards, or produce cards that do not meet expectations, it will reflect poorly on you.
  • Many Japanese businesses indulge in a process known as nemawashi, which involves asking each individual involved in a decision for their views one-on-one to gain a consensus opinion. This can be time-consuming, but do not allow any frustration to show.
  • Stay calm. Japanese associates will not appreciate raised voices or frantic gesticulation in a meeting. Try not to be too blunt, either – “let me think about this and come back to you” will always be received better than an outright, “no, this is not acceptable to me.”

What business structures are supported in Japan?

Many business structures are available in Japan, but only two are used frequently, especially by overseas investors. 

Type of Japanese business entityWhat is it?
Godo-Kaisha (GK)The equivalent of a limited liability company, every director of this business will be known as a “member” and must contribute an equal share of capital and hold identical authority over decision-making unless an Executive Manager is appointed.
Kabushiki-Kaisha (KK)By far the most popular business model in Japan, this business model can be opened from abroad with one director, though more directors can be appointed. In the latter case, one person must act as Executive Manager with ultimate authority. A KK keeps business affairs separate from personal finances.
Type of Japanese business structure

You could set up a branch of your overseas business in Japan if you prefer, but this requires even more red tape than opening a subsidiary business.

Taxation in Japan

If you want to do business in Japan, you must understand the taxation rules and regulations that will impact your bottom line. 

What is the corporate tax rate in Japan? 

Corporate tax (hōjinzei) in Japan is a standard rate of 23.2% (dropping to 15% if your annual income is less than ¥8,000,000), plus an additional local tax (chihō hōjinzei) of 10.3%

So, most businesses must pay 33.6% of corporation tax in Japan. If you invest ¥10,000,000 into an SME as an owner, you can reduce your gross taxable income by 25%, but that’s still a high rate. 

Thankfully, Japan has a double taxation treaty with the UK, so you will not be charged twice for any business profits.

What are the employee income tax brackets in Japan?

All employees in Japan need to pay income tax. These tax contributions break down as follows:

Annual salaryIncome tax rate
¥1,949,999 or lower5%
¥1,950,000 – ¥3,299,99910%
¥3,300,000 – ¥6,949,99920%
¥6,950,000 – ¥8,999,99923%
¥9,000,000 – ¥17,999,99933%
¥18,000,000 – ¥39,999,99940%
¥40,000,000 or higher45%
Income tax bands in Japan

It is the responsibility of the employer to withhold income tax from an employee’s wages upon running a monthly payroll. Employees must have social security contributions withheld from their monthly wage – 14.37% of a salary if the employee is younger than 40 and 15.27% once they exceed this age.

How are taxes paid in Japan?

The financial year in Japan mirrors the calendar year of January 1st to December 31st, and all tax filings and payments are due to the Kokuzei-chō by March 15th of the following year. Japanese taxation is very complicated, so partnering up with a third-party accountancy agency or hiring a dedicated, experienced accountant for your business is highly advisable.

Payroll and hiring Employees in Japan

Hiring the right talent can make or break a company. Ensure your Japanese business interests are staffed by the best possible talent.

Does Japan welcome overseas talent?

Japan was long considered a closed shop for overseas employees, but this is changing – Japan is now welcoming foreign talent who will bring unique skills and insights into the country. As a business owner, you should apply for a business visa, while foreign employees of your company will need a work permit. 

Who needs a visa or work permit to work in Japan?

Anybody that does not hold a Japanese passport will need a visa and/or work permit to get a job in Japan. In terms of employees for your company, this will only be awarded if you can prove that the local labour force cannot meet your recruitment needs.

What employee benefits are compulsory in Japan?

Employees of a Japanese business are entitled to comparatively limited benefits by law. The following are mandatory.

  • A minimum of 10 days of holiday, rising to 20 days after 6.5 years of service. Additional days will also be awarded on an incremental basis until this cap is reached.
  • Social security contributions of 15.33% of an employee’s salary (16.23% for employees over 40) to the Kōrō-shō.
  • 14 weeks of maternity leave pay, ranging from 67% – 100% of salary, depending on contract.

Employers are not required to offer sick pay in Japan (culturally, this country has a motto – “if you can walk, you can work”), but applications for a percentage of salary can be made through the Kōrō-shō.

Many employees will expect a private pension scheme as a benefit in Japan as the national pension is controversially low, but this is not a legal mandate.

Employment law considerations in Japan

Minimum wage in Japan varies according to territory, though it is widely considered lower than in most nations. In Tokyo, the minimum wage is ¥1,072 per hour.

Japanese employees are protected by the Labour Contracts Act. One of the critical tents of this Act is that male and female employees must receive equal pay for the same roles.

It is very difficult to terminate employees in Japan for underperformance. It is common practice for disgruntled employees to file for wrongful dismissal, and the courts typically file in favour of employees. In these instances, the employee must be reinstated to their previous role and remunerated for any salary lost during the termination period.

Cultural considerations when hiring employees in Japan

If you wish to run a business in Japan that relies upon the local labour force, ensure you understand some of the nuances you will encounter. These include:

  • Japanese employees often need to be reminded – and even convinced – to take their paid holidays, as they worry about being seen as selfish or burdening colleagues by not being in the office. When an employee in Japan books a personal holiday, however, they are not asking for permission – they are telling you they will not be available. Employers cannot block time off without a compelling reason.
  • Officially, Japanese employees are not permitted to work longer than 55 hours in any given week – 40 hours as standard and 15 hours of paid overtime. Japanese working culture often ignores this law, with many employees exceeding 40 hours without additional pay. So much so that karoshi – loosely translated as “death by overwork” – is a common concern.
  • Nomikai, or drinks after work, is a big part of Japanese office culture, especially along older employees. Your colleagues will socialise after work and often invite you to join them. It is considered good manners to accept these invitations – and not to scold or judge employees for drinking to excess, which is also very common. 
  • Hierarchy is everything in Japan. New employees, regardless of previous experience, will expect to start at the bottom rung at a company and work their way up. As a result, Japanese employees are likely to be loyal to your business rather than changing employers in the pursuit of career development but will expect to be rewarded for their dedication.
  • Japanese workplaces tend to be open plan, and as an employer, you will be expected to get involved with your employers and take on a mentorship role. Do not lock yourself away in a corner office with the door closed.

FAQs about setting up a business in Japan

Still have questions or are seeking a swift answer to a basic query? Here are some of the most frequently asked questions about establishing a business in Japan.

How long does it take to set up a Japanese entity?

It will take around two weeks to complete the paperwork necessary to set up a business entity in Japan, but it could take two or three months before you start trading.

What are the most common business structures in Japan?

If you wish to trade in Japan you can open a branch of your overseas business or form a Goshi-Kaisha (limited partnership), Godo-Kaisha (limited liability company), or a Kabushiki-Kaisha (joint stock company). The Kabushiki-Kaisha, known as a KK, is Japan’s most popular business structure.

Does an employer have to provide a pension in Japan? 

Employers must make contributions to the national pension in Japan as part of an employee’s benefits package, but most businesses also offer a private pension as a supplementary benefit to attract superior talent. 

Does Japan offer tax relief for start-up companies?

If you invest ¥10,000,000 (£60,500) or more into an SME in Japan, 25% of this investment sum can be deducted from your gross annual profit when preparing a tax return. 

What is a business manager visa in Japan?

A business visa allows non-Japanese citizens to enter the country, remain in the nation for at least four months, and start a new company. To qualify for a business visa, you must invest ¥5,000,000 (around £30,250) into a Japanese business interest and act as a company director. The application process is quite stringent, so ensure your business model is sound.

How much must employees and employers contribute to social security in Japan?

Social security contributions in Japan vary depending on the age of the employee. An employee under the age of 40 will have 14.37% of their salary withheld, while employees over 40 see this rise to 15.27%. Employers contribute 15.33% for employees under 40, and 16.23% for those over.

What is a common probationary period for employees in Japan?

Japanese employees can be placed on probation for up to one year, with three to six months common. It’s very difficult to terminate an employee that has completed their probation in Japan, so elongate this process as long as possible if you are unsure about a hire.

What is the total cost of employment to hire an employee in Japan?           

With a maximum social security contribution of 16.23%, employees will technically cost you 1.17% of their annual salary in Japan – though you may also wish to factor the expense of a private pension into your calculations.

What is the minimum share capital required to establish an entity in Japan?

There is no minimum capital requirement to open a branch office in Japan, and a Godo-Kaisha or Kabushiki-Kaisha can be formed with just ¥1 in capital. That is less than 1p in GBP!

Do you need to set up a local bank account in Japan?

Yes, you will need a local business bank account to trade in Japan.

What is the standard working week in Japan?

Officially, the Japanese working week is 40 hours per week, with a maximum of 15 hours of overtime. In reality, most Japanese employees work considerably longer hours than this.

What are common supplementary employee benefits in Japan?

If you want to attract the best local talent in Japan, offer a superior private pension. The national pension is a source of controversy in Japan, with many employees forced to work into their dotage as it does not cover the cost of living. 

Can employment contracts be terminated at will by the employer in Japan?

No, Japan does not recognise “at will” termination and employment law frequently favours the employee in the event of a dispute. If an employee successfully files a case of wrongful dismissal, they can be reinstated and will be owed back pay, so seek legal advice before terminating a contract.

What is the standard annual leave entitlement in Japan?

Employees are entitled to a minimum of 10 days of annual leave. Employee entitlement rises every year they spend with a company, capped at 20 days after 6.5 years of service. 

Can you establish a branch of your company in Japan?

Yes, if you have the time and patience to work through the mountains of red tape that will follow. Most businesses prefer to open a separate Kabushiki-Kaisha to act as a subsidiary company in Japan.

What are the main options for setting up payroll in Japan?

You can run payroll in-house or overseas in Japan or hire a third-party payroll agency to manage the process for you. As payroll is complicated in Japan, the latter is advisable to ensure you remain legally compliant. 

What are the different types of work permits and visas in Japan?

A business visa is the best choice if you wish to enter Japan to open and operate a new company. People that have a job offer in Japan can apply for a standard work visa or a highly skilled professional visa. The latter can offer a fast track to permanent residence in Japan.

Reviewed by , Managing Director

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