How to comply with the coming changes to
the Subcontract Act

A bill to amend the Japanese Subcontract Act and the Act on the Promotion of Subcontracting Small and Medium-sized Companies (“Subcontract Act”) was adopted on May 16, 2025, and the amended Subcontract Act will come into force on January 1, 2026.

The main impact will be that the amended Subcontract Act will apply to all companies having more than 300 employees (manufacturing sector) or more than 100 employees (service sector). The current Subcontract Act only applies to companies having a certain level of stated capital: since Japanese subsidiaries of foreign companies tend to have low capital amounts, the Subcontract Act often did not apply to them. This may now change and there is very little time left since companies should be compliant by January 1, 2026.

The Japan Fair Trade Commission(“JFTC”), who is the administrative organ in charge of enforcing the Subcontract Act, has signaled its intent to strengthen enforcement of the Subcontract Act and compliance is therefore becoming more and more important.

This column outlines key measures that companies should adopt to be compliant.

１. Overview of the amended Subcontract Act

The current Subcontract Act applies to “large procuring company” and “subcontractor” which are both defined by reference to capital thresholds (Articles 2(7) and 2(8) of the Subcontract Act). There are no minimum capital requirements in Japan and there have been reports of large companies structuring themselves to fall outside the scope of the Subcontract Act.

The amendment tries to address regulatory avoidance with an additional set of criteria based on the number of employees. With the new criteria (in red below), the Subcontract Act will apply if

(a) the transaction is one of those listed below; AND

(b) one of the three criteria on capital or number of employees apply. To give an example, if a business operator with more than 300 employees subcontracts a manufacturing operation to a contractor with no more than 300 employees, the transaction will be covered by the Subcontract Act. If the same business operator subcontracts the same operation to a contractor with more than 300 employees, the Subcontract Act will not apply to the transaction.

Transactions covered under the amended Subcontract Act
Transaction type	Business operator		Contractor
A. Subcontracting of manufacturing, repair, or software programming. Provisions of transportation, warehousing or information processing services.	JPY 300 million < stated capital	AND	stated capital ≦ JPY 300 million
	JPY 10 million < stated capital ≦ JPY 300 million		stated capital ≦ JPY 10 million
	More than 300 regular employees		Not more than 300 regular employees
B. Services not falling under A above. IT subcontracting other than software programming.	JPY 50 million < stated capital	AND	stated capital ≦ JPY 50 million
	JPY 10 million < stated capital ≦ JPY 50 million		stated capital ≦ JPY 10 million
	More than 100 regular employees		Not more than 100 regular employees

* Red text indicates new criteria added by the amendment.

2. Obligations of business operators (large procuring companies)

(1)　Identifying all transactions that may be covered by the Subcontract Act

The definition of "regular employees" has not yet been clarified by the JFTC but is expected to mean all employees employed under contracts with a duration of at least six months. Detailed criteria are expected to be published before the end of the year by the JFTC. In general, transaction types are interpreted conservatively by companies.

(2)　Development of a transactions management system

If a transaction is covered by the Subcontract Act, the business operator is required to deliver documents to the subcontractor indicating clearly the amounts due by the business operator to the contractor as well as the payment due dates. These documents as well as records of the transactions must be preserved.

Subcontracting agreements (or service agreements) may need to be checked for compliance with the Subcontract Act. Failure to comply may result in the imposition of fines on the business operator and the director or employee managing these agreements.

(3)　Review of payment methods

The amended Subcontract Act will prohibit the use of commercial bills (tegata) for transactions covered by the Act. In addition, the use of factoring or electronically recorded monetary claims (a system established in 2008 which streamlines commercial transactions by replacing paper commercial bills or promissory notes with publicly maintained electronic records) will be allowed only insofar as the contractor will still be paid in full (without the deduction of any fees) by the due date stipulated in the subcontract agreement. In practice, factoring or electronically recorded monetary claims may become obsolete as some fees are usually deducted from the amount paid to the contractor.

(4)　Revision of price negotiation practice

The revised Subcontract Act will impose obligations on business operators to consider price increase requests made by contractors. More precisely, business operators will not be able to fix prices without providing explanations or information or without accepting to discuss with the contractor in cases where the contractor has asked for prices to be increased because of an increase in the contractor's costs.

The JFTC has not yet clarified how this obligation should apply, what kind of explanation could be provided and in which conditions business operators may refuse the price increases requested by the contractor.

If a business operator fails to respect this new obligation, the JFTC may issue an order to the business operator to remedy the situation. The order may be published on the JFTC's website (with an indication of the name of the company, a summary of the violation, and the contents of the order).

3.　Conclusion

The amendment to the Subcontract Act may have a significant impact on business transactions in Japan, in particular for those companies who have not been subject to it so far. New systems will need to be put in place to ensure compliance, not only to identify transactions that will be covered by the Subcontract Act but also to ensure that those transactions remain compliant until full payment of the contractor. Companies will be expected to be fully compliant by January 1, 2026 leaving little time to prepare.

(Written by: Naoki Uemura, Jean-Denis Marx, Minoru Fukawa)

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*This newsletter is provided for educational and informational purposes only, and is not intended and should not be construed as legal or tax advice.
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