What “permanent establishment” means, and how Japanese law defines when it applies
Most of the conversation around hiring in Japan through an EOR focuses on employment law: who directs the worker, who’s licensed to supply labor, what happens if the relationship ends. There’s a separate question that gets far less attention and can carry a much larger bill: does the person you’ve hired in Japan also give your company a taxable presence there, regardless of who technically employs them.
This is the concept of a permanent establishment, or PE. It’s a tax law question, evaluated by a completely different set of rules than the labor law questions covered elsewhere on this site, and it runs on its own logic. Getting the employment structure right doesn’t settle it.
1. What a permanent establishment actually is
Corporate Tax Act Article 2, Item 12-19 defines PE, and Japan’s domestic definition breaks into three types:
恒久的施設 次に掲げるものをいう。 イ 外国法人の国内にある支店、工場その他事業を行う一定の場所で政令で定めるもの ロ 外国法人の国内にある建設若しくは据付けの工事又はこれらの指揮監督の役務の提供を行う場所その他これに準ずるものとして政令で定めるもの ハ 外国法人が国内に置く自己のために契約を締結する権限のある者その他これに準ずる者で政令で定めるもの 法人税法第2条十二の十九
Permanent establishment means the following: (i) a foreign company’s branch, factory, or other fixed place of business in Japan as prescribed by cabinet order; (ii) a construction or installation site, or a place of supervisory work related to it, in Japan, as prescribed by cabinet order; (iii) a person in Japan authorized to conclude contracts on the foreign company’s behalf, or a person equivalent to that, as prescribed by cabinet order.
(Corporate Tax Act, Article 2, Item 12-19 / 法人税法第2条十二の十九)
Where a tax treaty defines PE differently, the treaty version applies for a company eligible for treaty benefits. The underlying international principle, stated directly in the National Tax Agency’s own guidance, is that a foreign company’s business profit isn’t taxed in Japan at all unless it has a PE there:
「恒久的施設」を有しない非居住者に対する使用料等の対価については、源泉分離課税の対象とされます。（略）「恒久的施設なければ課税なし」という考え方が、事業所得課税の国際的なルールとなっています。
Payments to a non-resident without a permanent establishment are generally subject to withholding-only taxation. The principle of “no taxation without a permanent establishment” is the international rule for the taxation of business profits.
(National Tax Agency, Tax Answer No. 2883 / 国税庁タックスアンサーNo.2883「恒久的施設（PE）」)
That last line is the whole stakes of this article. Without a PE, none of a foreign company’s own business profit gets taxed in Japan, only the individual worker’s salary does. With a PE, a slice of the company’s own corporate profit becomes taxable in Japan, along with the corporate tax filing and transfer pricing documentation obligations that come with it.
2. Branch PE: when a fixed place of work becomes a fixed place of business
The first type turns on whether the foreign company has a place in Japan at its disposal, with enough permanence, through which its business is actually carried on. It doesn’t require a lease with the company’s name on it. A home office or a shared workspace used continuously for the company’s core business can qualify.
The practical test comes down to function and continuity: if an employee’s activities are critical to the foreign company’s business as a whole, and their home or an office space is used on a continuous basis to carry out that business, the place through which those activities happen can form a branch PE for the foreign company, regardless of whose name is on the lease.
The escape hatch is the preparatory or auxiliary exception: a place used only for activities that are preparatory or auxiliary to the business doesn’t count. But that exception is read narrowly, and it doesn’t cover the activities most overseas companies actually want a Japan hire doing. Sales, business development, and marketing are generally not treated as auxiliary, no matter how the job title is worded.
The OECD’s November 2025 update to the Model Tax Convention Commentary added a specific framework for remote work: a home used for less than 50% of an employee’s total working time over twelve months is generally not treated as a place of business, and even above that threshold, there has to be a genuine commercial reason for working from that location, not just cost savings. That’s treaty-level guidance rather than Japanese domestic law, but it applies wherever the client’s home country has an OECD-model treaty with Japan, and it signals where international enforcement is heading.
3. Agent PE: the test that doesn’t care who signs the contract
The second, and for most EOR arrangements more relevant, category is agency PE. The NTA’s own definition covers two separate ways a person can trigger it:
非居住者等が国内に置く代理人等で、その事業に関し、反復して契約を締結する権限を有し、または契約締結のために反復して主要な役割を果たす者等の一定の者
A person in Japan who either has authority to habitually conclude contracts on the foreign company’s business, or habitually plays the principal role leading to the conclusion of contracts.
(Corporate Tax Act Enforcement Order, Article 4-4, Paragraph 7 / 法人税法施行令第4条の4第7項)
That second clause used to not exist in this form. Before Japan’s 2018 tax reform, agent PE required actual signing authority “in the name of” the foreign company, which created a well-known workaround: let the Japan-based person handle the entire relationship, the pitch, the negotiation, the terms, and have someone outside Japan formally sign. No signing authority in Japan meant no agent PE.
Japan’s 2018 reform, aligned with the OECD’s BEPS Action 7 recommendations, closed that specifically. A summary from Daiwa Institute of Research at the time of the reform described the change directly:
The definition of agent PE under the model convention was revised so that, in addition to satisfying the requirement of “a contract concluded in the name of the enterprise,” satisfying the requirement of “a contract relating to the sale of the enterprise’s goods” could also trigger agent PE.
The practical consequence is straightforward: a person authorized to negotiate all elements and details of a contract in a way that’s binding on the foreign enterprise is considered to exercise sufficient authority, even where the contract is formally signed by someone else outside Japan.
In plain terms: if the Japan-based person is the one shaping what the client agrees to, working out pricing, scope, or terms, and getting the client to yes, routing the final signature abroad doesn’t avoid agent PE. It only avoids it if the Japan-based role is genuinely limited to something else, such as post-contract account management with no involvement in negotiating new terms, pricing, or renewals.
4. Why the risk varies so much by role
Neither test above cares about job title or seniority. Both come down to function: is there a fixed place in Japan, used continuously, through which the company’s actual business gets carried on, and does a person here conclude or substantively shape what a customer agrees to.
That’s why the same “EOR employee” question produces very different answers depending on what the role actually does. Sales, business development, and any role with real authority over pricing, terms, or contract negotiation sits closest to the agent PE test described above, since shaping what a customer agrees to is close to the exact fact pattern the rule targets. Marketing, customer support, and account management can vary widely depending on whether the role ever touches deal terms or stays purely promotional and relationship-focused. Engineering, product, finance, HR, and other functional roles executing under direction from headquarters sit furthest from either test, since neither concluding contracts nor managing the enterprise’s overall business is part of what those roles do.
None of this turns on how senior the person is or what their title says. A senior functional leader with real authority over their own department isn’t the same thing as someone managing the enterprise’s affairs or shaping what customers buy, and a junior salesperson closing small deals can trigger the same test as a country manager doing it at scale.
This article quotes the Corporate Tax Act (法人税法) and National Tax Agency guidance directly, along with published commentary from Daiwa Institute of Research on Japan’s permanent establishment rules. It is provided for general informational purposes only, to explain what permanent establishment means and how the legal tests work. It is not legal or tax advice, is not directed at any specific company or arrangement, and should not be relied on to structure a specific role or engagement. Companies evaluating their own tax position in Japan should consult qualified Japanese tax counsel regarding their specific facts.