Shadow Payroll in Japan for Seconded Employees

Shadow payroll is a payroll calculation run in Japan for pay that is delivered somewhere else. A seconded employee keeps receiving some or all of their salary from the home company abroad, while the Japan subsidiary that employs them day to day has to work out what Japanese income tax and social insurance apply to that pay.

Japanese law has no rule called "shadow payroll". Withholding, year-end adjustment and social insurance each have their own test, and each treats home-paid salary differently.

Key Takeaways

• Withholding follows the place of payment. Income Tax Act Art. 183 puts the duty on whoever pays a resident's salary in Japan, so salary the home company pays abroad is not withheld by anyone in Japan.
• Home-paid salary is still taxable in Japan. Pay for work done in Japan is Japan-source income wherever it is paid, and the secondee reports it in a final return.
• Year-end adjustment covers only the subsidiary's own payroll. It never absorbs the home-paid portion, and it does not run at all when the subsidiary's salary for the year exceeds JPY 20 million (Income Tax Act Art. 190).
• Social insurance turns on whose pay it is. The Japan Pension Service counts pay from another entity when the employing establishment's own pay or secondment rules show it substantively pays it; its examples concern staff sent abroad from Japan.
• A certificate of coverage can exempt the secondee. Japan has social security agreements in force with 24 countries, with different scope.

Does the Japan subsidiary have to withhold tax on salary paid abroad?

No, not on the home-paid part. Japanese withholding attaches to salary paid in Japan, so the subsidiary withholds on what it pays itself, and salary the foreign parent pays outside Japan to a resident secondee is outside the withholding system altogether.

The rule is in Income Tax Act Art. 183: a person who pays salary to a resident in Japan must withhold income tax at the time of payment and remit it by the 10th of the following month. Our withholding tax guide covers rates and deadlines.

For non-residents, Art. 212(2) deems a payment made abroad to be made in Japan when the payer has an address or an office in Japan. No equivalent deeming rule exists for residents, so the foreign parent paying a resident secondee abroad does not become a withholding agent.

Art. 161(1)(xii)(a) treats pay for work performed in Japan as Japan-source income wherever it is paid. A secondee who is a resident therefore owes Japanese tax on the home-paid portion and settles it personally in a final return.

Is a secondee a resident or a non-resident for Japanese tax?

Secondees on assignments that normally require a year or more in Japan are presumed to be residents from arrival. Residence decides how much of their pay Japan taxes and how the home-paid portion is reported.

Income Tax Act Art. 2 defines a resident as an individual with a domicile in Japan or a residence here for one year or more. Income Tax Order Art. 14 presumes a domicile for someone who comes to Japan to work in an occupation that normally requires living here continuously for one year or more.

A non-Japanese resident who has had a domicile or residence in Japan for five years or less in the past ten years is a non-permanent resident under the same Art. 2.

Status	Test (Income Tax Act)	What Japan taxes (Art. 7)	Home-paid salary for work in Japan
Permanent resident (tax sense)	Domicile, or 1 year of residence, in Japan	All income worldwide	Taxable; not withheld; final return
Non-permanent resident	Non-Japanese; 5 years or less in Japan in the past 10	Japan-source income, plus foreign-source income paid in or remitted to Japan	Taxable as Japan-source income; final return
Non-resident	Neither domicile nor 1 year of residence	Japan-source income only	Taxable unless a treaty exempts it; withheld if the payer itself has an address or office in Japan (Art. 212(2)), otherwise a return under Art. 172. The Japan subsidiary is a separate company, not the parent's office

What does year-end adjustment cover for a secondee with split pay?

Year-end adjustment only reconciles the tax on salary the subsidiary itself paid. The home-paid portion stays outside it, so the secondee files a final return for the year even when the subsidiary completed the adjustment correctly.

Under Art. 190, the employer that received the employee's dependents declaration (扶養控除等申告書, fuyou koujo tou shinkokusho) recalculates the year's tax on the salary it paid and settles the difference in the last pay of the year. The same article of the Act says it does not run the adjustment when its salary for the year exceeds JPY 20 million. Our year-end adjustment runbook covers the process.

Art. 121 lets a salaried resident skip the final return only when all of their salary was subject to withholding under Art. 183 or Art. 190 and total salary is JPY 20 million or less. Home-paid salary was never withheld, so the exemption fails and the return is due between 16 February and 15 March under Art. 120. The National Tax Agency's list of who must file includes anyone paid salary by a payer with no withholding obligation.

The withholding slip (源泉徴収票, gensen choshu hyo) and the January 31 statutory filings show only Japan-paid salary.

When does home-paid salary count for social insurance?

Social insurance counts what the employee receives as consideration for work from the employing establishment. Pay from another entity is included when that establishment's own pay or secondment rules show it substantively pays it.

The test comes from the Japan Pension Service leaflet on overseas pay, which calls the employer the applicable establishment (適用事業所, tekiyou jigyousho). Its worked examples all concern employees sent abroad from a Japanese establishment. For a secondee in Japan, the applicable establishment is the Japan subsidiary that enrolled them, and the leaflet directs employers whose facts do not fit its examples to the competent pension office.

The resulting figure feeds the July reset and mid-year changes described in our guide to standard monthly remuneration.

Item paid to the secondee	Standard monthly remuneration	Basis in the Japan Pension Service leaflet
Salary and allowances paid by the Japan subsidiary	Included	Consideration for work from the applicable establishment
Salary paid by another entity but set by the Japan entity's pay or secondment rules	Included	Substantively paid by the applicable establishment
Housing or meals provided by the employer	Included	Benefits in kind are remuneration
Relocation travel reimbursed at actual cost	Not included	Reimbursement at actual cost (参考1 in the leaflet)
Pay in a foreign currency	As above, in yen	Converted at the exchange rate on the payment date

How much does including home-paid salary change the premiums?

The difference can be large because each scheme has its own ceiling. With Japan-paid salary of JPY 500,000 and home-paid salary of JPY 1,000,000 a month, counting the home-paid part takes health insurance to its top grade and pension to its cap.

The example below uses the Tokyo Kyokai Kenpo health insurance rate of 9.85% from March 2026 and the 0.23% child-care support levy from April 2026, both on the Kyokai Kenpo FY2026 rate page, and the 18.3% pension rate and the employer-only 0.36% child-rearing contribution (子ども・子育て拠出金, kodomo kosodate kyoshutsukin) on the pension grade, both in the Japan Pension Service premium table from April 2026. The employee is under 40, so no nursing care premium applies. Employment insurance is not included.

Monthly figure	Home-paid salary excluded	Home-paid salary included
Health insurance standard monthly remuneration	JPY 500,000	JPY 1,390,000 (top grade, Health Insurance Act Art. 40)
Pension standard monthly remuneration	JPY 500,000	JPY 650,000 (top grade)
Health insurance at 9.85%	JPY 49,250	JPY 136,915
Child-care support levy at 0.23%	JPY 1,150	JPY 3,197
Pension at 18.3%	JPY 91,500	JPY 118,950
Child-rearing contribution at 0.36% (employer only, Japan Pension Service rate)	JPY 1,800	JPY 2,340
Total at the statutory rates, employer and employee shares	JPY 143,700	JPY 261,402

On these statutory rates the gap is JPY 117,702 a month. Because the test follows the pay and secondment rules, not the bank account the salary lands in, the secondment terms largely settle it.

What does a certificate of coverage change?

A certificate of coverage from the home country can exempt the secondee from the Japanese systems their country's agreement covers. Without one, a secondee employed by the Japan subsidiary is enrolled like any other employee, and the remuneration test applies.

The Japan Pension Service list of agreements shows 24 countries in force. Four of them (the United Kingdom, Korea, China and Italy) only remove dual coverage and do not add up contribution periods. The exemption applies to a worker detached for an expected period of five years or less who stays covered by, and employed by, the home-country employer. Some agreements cover only pension on the Japanese side, so the secondee can still be enrolled in Japanese health insurance.

Home country	Japanese systems covered by the agreement	Periods totalized
United States	Pension and health insurance	Yes
France	Pension and health insurance	Yes
Germany	Pension	Yes
India	Pension	Yes
United Kingdom	Pension	No
China	Pension	No

The coverage scope comes from the Japan Pension Service table of effective dates and applicable systems. Lump-sum withdrawal on leaving Japan is covered in our post on Japan pension for expats.

What monthly data does the Japan subsidiary need from headquarters?

The subsidiary needs every home-paid amount, its payment date and currency, and the terms that say whose pay it is. Without that file it cannot decide the standard monthly remuneration, and the secondee cannot file an accurate return.

Data item	What it decides in Japan
Home-paid base salary: gross amount, currency, payment date	Japan-source income for the final return; remuneration if the Japan entity substantively pays it
Allowances paid abroad (cost of living, housing, education, home leave)	Same two tests as base salary, item by item
Benefits in kind paid by HQ (lease, school fees)	Taxable income; remuneration in kind where provided by the employer
Bonuses and incentives: amount, payment date, period earned	Final return; standard bonus amount if the Japan entity substantively pays it
Equity vesting or exercise events	Income reporting in Japan (see our post on global bonus and equity plans)
Exchange rate used and its date	Yen conversion at the payment-date rate for social insurance
Expense reimbursements, with receipts	Actual-cost reimbursements stay out of remuneration
Recharge invoices to the Japan entity and the secondment agreement	Evidence of whose pay rules govern the home-paid salary
Certificate of coverage, with start and end dates	Exemption from the Japanese systems the agreement covers
Hypothetical tax withheld under a tax equalization policy	A group policy deduction; not a payment of Japanese tax

Frequently asked questions

Is withholding tax deducted from a bonus paid by the home company?

No one in Japan withholds on a home-paid bonus to a resident secondee. For the secondee's final return, a foreign-currency bonus is converted to yen at the bank's mid-rate (TTM) on the day it is recognised as income (Income Tax Act Art. 57-3, National Tax Agency basic circular 57-3-2). A bonus the Japan subsidiary pays is, in principle, withheld using the bonus table; see bonus withholding tax in Japan.

Does the withholding tax certificate cover salary paid abroad?

No. The secondee prepares the final return from the certificate and the home payroll records together, so HQ should keep the home-paid figures for each Japanese tax year, January to December.

Is a secondee enrolled in Japanese social insurance?

Yes, if the Japan subsidiary employs them and no certificate of coverage applies. Enrolment is due within five days of the start of employment; our enrolment guide covers the filings.

Working with AQ Partners. Our Tokyo team provides social and labour insurance enrolment and year-end adjustment for foreign companies operating in Japan. Book a consultation to discuss your situation.