Introduction

Foreign companies do not always establish a Japanese subsidiary or branch office at the beginning of their market entry.

A company may first want to conduct market research, appoint one sales representative, or engage someone in Japan to provide services to local customers.

There are five main ways for a foreign company to engage personnel in Japan without establishing a Japanese subsidiary or branch:

1. Directly employ a Japan-based individual
2. Assign an existing overseas employee to Japan
3. Use an Employer of Record (EOR)
4. Use a Japanese staffing agency
5. Enter into an independent contractor agreement with an individual in Japan
   

This article compares these options from the perspectives of work visas, social insurance, individual income tax, permanent establishment risk, termination, and employee development.

 

1. Directly Employing a Japan-Based Individual

A foreign company without a subsidiary or branch in Japan may enter into an employment agreement directly with an individual residing in Japan.

Direct employment is not prohibited even if the foreign company has no Japanese entity. However, it can create practical difficulties concerning permanent establishment.

A permanent establishment, commonly referred to as a PE, is generally a fixed place or other taxable presence through which a foreign company carries on all or part of its business in Japan.

If a foreign company is considered to have a PE in Japan, it may be required to file Japanese corporate tax returns and pay Japanese corporate tax on profits attributable to that PE.

Typical categories of PE include:

A. A branch, office, or other fixed place of business
B. A construction-site PE
C. An agency PE arising from the activities of a person involved in concluding contracts

A. If a foreign company leases an office in Japan where its Japanese employees work,
the office may be regarded as a Japanese branch office.

If a foreign company does not lease an office and its employees work remotely, an employee’s home office does not automatically constitute a PE. However, the employee’s home may be treated as a place of business of the foreign company where, for example:

• • • A significant part of the foreign company’s Japanese business is entrusted to the employee
    • The employee continuously performs core consulting or other revenue-generating activities from home
    • The foreign company requires the employee to work continuously from that home
    • The foreign company does not provide any other business location in Japan

C. For example, an employee may create an agency PE if that employee habitually concludes contracts with customers in Japan or habitually plays the principal role leading to the conclusion of contracts.

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2. Assigning an Existing Overseas Employee to Japan

A foreign company may assign an existing employee from its overseas headquarters or another foreign office to work in Japan on a temporary or long-term basis.

This can be an effective way to transfer corporate culture, technical expertise, and business know-how to the Japanese market. However, where the company has no subsidiary, branch, or other operating base in Japan, obtaining an appropriate work status may be difficult.

Work visas

A foreign national who is sent to Japan to perform ongoing work must generally hold an appropriate work-authorized status of residence.

Common statuses used by foreign nationals include:

• Business Manager
• Engineer/Specialist in Humanities/International Services
• Intra-company Transferee

These statuses generally assume the presence of a Japanese host organization, office, subsidiary, branch, or other operational base.

Accordingly, where a foreign company has no subsidiary, branch, or other business base in Japan, it will generally be difficult to assign a foreign employee to work in Japan on a long-term basis.

Short visits for meetings, negotiations, market research, and similar business activities may be possible under Temporary Visitor status.

However, Temporary Visitor status does not permit the individual to provide ongoing services or perform ordinary day-to-day work in Japan.

As an exception, an employee who holds a status such as Spouse or Child of a Japanese National may be able to reside and work in Japan without obtaining a separate work status.

Individual income tax

Salary attributable to duties performed in Japan is generally subject to Japanese income tax.

However, Japanese tax may be exempt under the short-term business visitor provisions of an applicable tax treaty if all relevant requirements are satisfied.

These requirements commonly include:

• The individual’s stay in Japan does not exceed the treaty threshold
• The salary is paid by an employer that is not a Japanese resident
• The salary cost is not borne by a Japanese PE

Permanent establishment

Having an employee in Japan creates the same PE risk as directly employing a Japan-based individual.

 

3. Using an Employer of Record

In recent years, foreign companies without a Japanese subsidiary or branch have increasingly used Employer of Record services to engage personnel in Japan.

Well-known global EOR providers include Remote and Deel.

Under a typical EOR arrangement, the EOR company enters into the employment agreement with the individual and handles payroll, social insurance, labor insurance, and tax withholding.

The foreign company, meanwhile, usually manages the employee’s day-to-day work.

From the foreign company’s perspective, the commercial function of an EOR can resemble a worker dispatch or staffing agency in Japan. 

When an EOR may be suitable

An EOR may be suitable where:

• The foreign company has already identified the person it wishes to hire
• The company wants that person to work exclusively for it
• The company has not yet decided whether to establish a Japanese entity
• The company wants to outsource Japanese payroll and social insurance administration
• The company wants to test the Japanese market for a limited period
• A conventional Japanese staffing agency is not willing or able to support a foreign company with no Japanese office

Compared with direct employment, an EOR can simplify social insurance, payroll, and individual income tax withholding.

However, using an EOR does not eliminate PE risk.

Work visas

No work visa is required for a Japanese national.

Social insurance

The EOR company will normally enroll the employee in:

• Employee health insurance
• Employees’ pension insurance
• Employment insurance
• Workers’ compensation insurance

The foreign company generally does not need to register as a Japanese social insurance establishment.

Individual income tax

The EOR company will normally pay the salary and handle:

• Income tax withholding
• Special collection of inhabitant tax
• Year-end tax adjustment
• Payroll-related statutory reporting

The foreign company will generally not need to perform Japanese payroll or salary withholding procedures directly.

Permanent establishment

Even if a foreign company has no fixed office or directly employed personnel in Japan, using an EOR may still create a PE risk.

An agency PE risk may arise where the employee performs activities such as:

• Negotiating contracts with customers
• Determining material contractual terms
• Playing the principal role leading to the conclusion of contracts

Even when the employee does not participate in the contract's conclusion, a fixed-place PE issue may arise if the employee provides the foreign company’s core services in Japan.

For example, assume that a foreign company provides sustainability consulting services. The contracts are signed by the overseas headquarters, but the EOR employee continuously provides the consulting services to Japanese customers from a home office in Japan.

In this case, the employee is not merely carrying out sales or support work. The employee is performing the actual service that generates the foreign company’s revenue.

If the foreign company requires the employee to work continuously from that home and provides no other business location in Japan, it may be necessary to consider whether the home office constitutes the foreign company's place of business.

An EOR is therefore a solution for administering employment, payroll, and social insurance. It is not a mechanism that automatically blocks Japanese corporate tax or PE exposure.

Termination of the EOR service

The foreign company is not the employee’s direct legal employer and therefore does not dismiss the employee directly.

Instead, the foreign company terminates its service agreement with the EOR, and the EOR manages the employment consequences.

However, where termination at the foreign company’s request results in the EOR incurring employment-related costs, the contract may require the foreign company to reimburse those costs.

Potential costs may include:

• Fees for the contractual notice period
• Severance-equivalent costs
• Unused paid leave
• Termination administration fees
• Other employment-related liabilities incurred by the EOR

The foreign company benefits from not having to manage the dismissal process directly, but the economic cost of termination does not necessarily disappear.

 

4. Using a Japanese Staffing Agency

A Japanese staffing agency employs workers and dispatches them to companies that need personnel.

The staffing agency is the legal employer, while the client company gives the worker day-to-day instructions.

The typical structure is as follows.

Employment agreement

The worker enters into an employment agreement with the staffing agency.

The staffing agency is responsible for salary, benefits, social insurance, and labor insurance.

Worker dispatch agreement

The staffing agency and the client company enter into a worker dispatch agreement.

The agreement generally specifies the duties, work location, dispatch period, working hours, and responsible personnel.

Direction and supervision

The client company provides the dispatched worker with direct instructions regarding day-to-day work.

In this respect, worker dispatch and EOR can perform similar commercial functions from the perspective of a foreign company.

However, Japanese staffing agencies may not always be willing to accept a foreign company without a Japanese office as a client.

This is because issues may arise concerning:

• Appointment of a responsible person at the client
• Identification of the work location
• Timekeeping and supervision
• Health and safety obligations
• Maintenance of dispatch records
• Compliance with the client-side obligations imposed under Japanese law

Permanent establishment risk

As with EOR, PE risk depends on the actual duties, authority, work location, and continuity of the worker’s activities.

 

5. Entering into an Independent Contractor Agreement

A foreign company may engage an individual in Japan as an independent consultant, sales agent, engineer, designer, or other professional.

Under an independent contractor arrangement, the individual is not an employee of the foreign company but operates as an independent business.

Permanent establishment

Where the contractor is genuinely independent and performs services at their own risk and discretion, PE risk may be lower than in an employment arrangement.

Relevant indicators of independence may include:

• The contractor has multiple clients
• The contractor decides when and where to work
• The contractor determines how to perform the services
• Compensation is based on deliverables or projects
• The contractor bears business risk
• The contractor does not conclude contracts on behalf of the foreign company

However, an agency PE may arise if the contractor habitually concludes contracts for the foreign company or habitually plays the principal role leading to contract conclusion.

 

Conclusion

A foreign company can engage personnel in Japan in more than one way without establishing a Japanese subsidiary or branch.

Using an EOR or staffing agency can simplify payroll, social insurance, and tax withholding.

However, changing the employment structure does not necessarily eliminate PE risk where the individual is actually carrying on the foreign company’s business in Japan.