Major amendments to Japan’s Subcontract Act: What businesses need to know

From 1 January 2026, Japan will implement significant reforms to the Act against Delay in Payment of Subcontract Proceeds, etc. to Subcontractors (the Subcontract Act).

The amended act is known as the Act Against Delay in Payment of Fees, etc. to Small and Medium-sized Entrusted Business Operators in Manufacturing and Other Specified Fields (the Proper Transactions Act). It introduces substantial changes aimed at strengthening protections for subcontractors and ensuring fairness in subcontracting practices.

 

Change of names

Under the current Subcontract Act, regulated parties are referred to as “large procuring enterprises” (oya-jigyosha) and “subcontractors” (shitauke-jigyosha). But as these terms don’t reflect the actual business relationships, they’ve been changed to “commissioning enterprises” (Main Contractors) and “small and medium-sized contracting enterprises” (SMEs).

 

Scope of the application

The Proper Transactions Act applies if a contract falls under certain types of outsourcing transactions and the contracting parties satisfy certain thresholds.

There are two requirements:

Requirement 1: the Proper Transactions Act covers outsourcing agreements, including:

• manufacturing contracts
• repair contracts
• information-based product creation contracts
• service contracts and
• specified transportation consignment contracts

Of these five types of contracts, transportation consignment contracts are new.

Requirement 2: under the Subcontract Act, applicability was determined solely by each party’s stated capital (or total contributions). Under the amended Act, employee headcount is an additional criterion.

There are two rules regarding the new threshold:

General rule

When any of the following are met, the Proper Transactions Act applies:

• The outsourcing company's stated capital exceeds JPY300 million, and the outsourced company's stated capital is JPY300 million or less.
• The outsourcing company's stated capital exceeds JPY10 million but doesn’t exceed JPY300 million, and the outsourced company's stated capital is JPY10 million or less.
• The outsourcing company regularly employs more than 300 employees, and the outsourced company regularly employs 300 employees or fewer.

Special rule

For information-based product creation contracts and service contracts (excluding when the contract covers program development, transportation, storage of goods in warehouses, and information processing), the following criteria applies:

• The outsourcing company's stated capital exceeds JPY50 million, and the outsourced company's stated capital is JPY50 million or less.
• The outsourcing company's stated capital exceeds JPY10 million but doesn’t exceed JPY50 million, and the outsourced company's stated capital is JPY10 million or less.
• The outsourcing company regularly employs more than 100 employees, and the outsourced company regularly employs 100 employees or fewer.

When the above criteria are met, the outsourcing company is classified as a Main Contractor and the outsourced company is classified as an SME, and the Proper Transactions Act will apply to the contract.

Acts that attempt to circumvent these thresholds by using subsidiaries or similar entities are also prohibited.

 

Main Contractor's obligations

Main Contractors have the following obligations.

• Provide written documentation – Main Contractors need to deliver SMEs a written document, stating the details of the contract terms immediately after ordering the outsourcing work.
• Set due date – Main Contractors need to set the payment due date as soon as possible and, in any event, no later than 60 days from the date of receiving goods or completion of services.
• Prepare and retain records – Main Contractors need to prepare a record of the transaction in written or electronic form and retain it for two years.
• Late payment interest – If Main Contractors fail to pay the fee to SMEs by the due date, they need to pay the late payment fee at an annual rate of 14.6% from the day after 60 days of receiving goods or services.

 

Prohibited acts by the Main Contractor

In addition to the above obligations, the Proper Transactions Act prohibits Main Contractors from committing the following 11 types of conduct towards SMEs.

1. Refusing to accept goods or services.
2. Failing to pay the fee by the agreed due date.
3. Reducing the fee that was agreed in advance.
4. Returning goods that have been received.
5. Setting an unreasonably low fee compared to similar products or market prices.
6. Forcing SMEs to purchase or use goods or services designated by the Main Contractor.
7. Taking retaliatory actions against SMEs (such as reducing transaction volume or suspending transactions) because the SMEs reported unfair practices to the Fair Trade Commission.
8. Offsetting or requiring payment for materials that Main Contractor has provided to SMEs before the due date of the outsourcing fee.
9. Requesting SMEs to provide money, labour, or other benefits.
10. Changing the order details or requiring rework after delivery without bearing the cost.
11. Refusing price negotiation request by SMEs or unilaterally deciding the price without providing necessary explanations to SMEs.

In relation to failing to pay the fee by the agreed due date, the Proper Transactions Act prohibits Main Contractors from settling fees owed to SMEs with promissory notes or other payment methods (such as electronically recorded monetary claims) that make it difficult for SMEs to receive the full amount of the fee by the payment due date. Main Contractors must make full payment in cash to SMEs within 60 days from the date of receipt of goods or services, or by the agreed due date, whichever is earlier.

Item 11 above is new in this amendment. Any act that disregards the price negotiation process is now considered a violation of the Proper Transactions Act.

 

Implications for businesses

While the rules under the Proper Transactions Act are broadly similar to those under the Subcontract Act, the scope of application has been expanded, and Main Contractors will face additional obligations and regulatory requirements.

This new legislation is expected to have a significant impact on companies conducting business in Japan. The supervisory authorities’ powers to provide guidance and advice to Main Contractors, and the information-gathering framework related to the prohibition of retaliatory measures against SMEs, have also been strengthened.

We recommend that companies carefully assess whether their contracts satisfy requirements 1 and 2 outlined above. If they do (and particularly if the company is classified as a Main Contractor), it’s essential to review the relevant agreements to ensure they comply with the Proper Transactions Act.