Japanese Companies in the UK: Global Mobility Tax Challenges

One of the most significant recent developments affecting expatriates assigned to the UK has been the introduction of the Foreign Income and Gains (FIG) regime.

The new rules replace the long-established remittance basis regime and fundamentally alter the way foreign income and gains are taxed for many individuals arriving in the UK. For Japanese expatriates who have significant overseas investments, rental income, dividend income or capital gains, the changes can have a substantial financial impact.

From an employer perspective, the FIG regime raises a number of important questions. Companies must consider whether additional tax costs should be borne by the employee or the employer, how tax equalisation arrangements should be adapted, what impact the changes may have on assignment cost projections and whether existing mobility policies continue to achieve their intended objectives.

Particularly for senior executives and highly compensated employees, the potential exposure can be significant. A UK assignment that previously appeared relatively straightforward may now involve much higher tax costs than originally anticipated.

Leading organisations are therefore reviewing their global mobility policies to ensure they clearly define how additional host-country taxes will be treated. Policies should address whether the company will reimburse tax on personal income, what types of income are eligible for support, whether any limits or caps apply and under what circumstances employees will be expected to bear additional tax liabilities themselves.

Companies are also beginning to consider practical planning measures. These may include limiting UK assignments to four years where commercially feasible, as relief is generally available only during the initial qualifying period, reviewing assignment duration before deployment and minimising repeat UK assignments where an individual’s previous UK residence history could affect future eligibility. I expect the ten-year gap requirement under the current rules will be becoming particularly important when assessing future assignment planning.

More broadly, organisations should continue working closely with specialist advisers in key jurisdictions to ensure emerging legislative changes are identified early and incorporated into mobility strategies before unexpected costs arise.

Another issue that has created significant uncertainty for Japanese companies operating in the UK over the past two years is the UK tax treatment of employer contributions to Japan’s health insurance system (Kenko Hoken).

Under the Japanese social security system, Kenko Hoken forms an integral part of the overall compulsory social insurance framework, and employers are required to make contributions on behalf of employees. However, HMRC has raised concerns that employer contributions to Kenko Hoken may constitute a taxable benefit in kind for UK tax purposes when paid in respect of employees working in the UK.

This position has created considerable practical difficulties for Japanese employers. In reality, expatriate assignees working in the UK rarely derive meaningful day-to-day benefits from the Japanese health insurance system, as most assignees are provided with private medical insurance during their assignment and typically receive medical treatment through the UK’s healthcare system or private healthcare providers. As a result, many employers question whether it is appropriate to treat employer-funded Kenko Hoken contributions as a taxable employment benefit.

The issue has attracted significant attention within the Japanese business community. The Embassy of Japan in the United Kingdom, the Japanese Chamber of Commerce and Industry in the UK (JCCI), and the Chartered Institute of Taxation (CIOT) have all been engaging with HMRC in an effort to seek clarification and to explain the practical implications for Japanese businesses and employees. Discussions remain ongoing and, at the time of writing, no definitive resolution has been reached.

This is an area that Japanese companies should monitor closely. If HMRC were ultimately to issue formal guidance confirming that employer Kenko Hoken contributions must be treated as taxable benefits in kind, the financial consequences could be substantial. This is particularly true for Japanese organisations with large expatriate populations in the UK, where historic exposures and future compliance costs could potentially result in significant additional tax liabilities for the employers.

A less obvious but increasingly important issue concerns retirement benefits received long after an employee’s UK assignment has ended.

Many employers assume that once an assignee has returned to Japan or moved elsewhere, any UK tax exposure effectively disappears. However, this is not always the case. Certain pension and retirement lump sum payments may remain partially taxable in the UK even where the employee has not been UK resident for many years and the assignment concluded long ago.

The challenge is that these payments often arise many years after repatriation, by which time assignment records may no longer be readily available and the organisation may have limited visibility over the former assignee’s circumstances.

Some multinational organisations address this risk by retaining historical assignment data for extended periods, often at least five to ten years after repatriation. If a former UK assignee subsequently retires, leaves employment or receives a pension-related lump sum payment, obtaining specialist advice can help determine whether any residual UK tax reporting or withholding obligations remain.

Maintaining long-term visibility over former assignees may seem burdensome, but it can significantly reduce the risk of unexpected compliance issues surfacing years after an assignment has been completed.

Although tax often receives most of the attention, social security can create equally significant operational challenges.

Under applicable social security agreements, including the agreement between the UK and Japan, employees may be able to remain within their home country social security system for a specified period. In practice, however, obtaining the necessary Certificate of Coverage (CoC) is not always straightforward.

Processing times can vary significantly, and delays can cause problems ranging from payroll administration difficulties to complications during immigration reviews or compliance audits. In some cases, employees may find themselves unable to demonstrate their exemption status simply because the relevant documentation has not yet been issued.

The most effective way to manage these risks is through proactive planning. Organisations should begin applications well before assignments commence, maintain clear ownership of the application process and closely monitor progress. Working with specialist advisers can also help ensure that applications are completed accurately and submitted on time. Equally important is maintaining central oversight of assignment extensions and certificate renewal dates so that exemptions do not unintentionally lapse.

Equity-based remuneration is becoming an increasingly important component of reward packages within many Japanese multinational groups. However, when employees move between countries during the life of an award, determining the correct tax treatment can become extremely complicated.

Whether the award takes the form of stock options, restricted stock units (RSUs), performance shares or other long-term incentive arrangements, employers frequently face difficult questions regarding which country has taxing rights, how income should be apportioned between jurisdictions, whether payroll reporting obligations arise and whether social security contributions are due.

The challenge becomes even more pronounced where employees relocate several times during the vesting period. Without accurate records of when and where the employee performed services, determining the appropriate tax treatment can be extremely difficult.

To address these challenges, many multinational organisations are adopting specialist equity tracking systems that monitor employee mobility throughout the award life cycle. These systems can allocate taxable income across jurisdictions, support payroll reporting requirements and provide detailed audit trails that help organisations manage their compliance obligations. For companies with large internationally mobile populations, technology is increasingly becoming essential to ensure accurate reporting and avoid costly errors.

The common theme running through all of these challenges is that global mobility is becoming more complex, more data-driven and more closely scrutinised by tax authorities around the world.

For Japanese companies operating in the UK, success is no longer simply about managing a relatively small population of expatriates. It increasingly requires a coordinated strategy encompassing business travellers, remote workers, equity compensation, social security compliance, changing tax legislation and even retirement benefits that may not arise until many years in the future.

The organisations that adapt successfully will be those that invest in technology, establish robust governance processes and maintain sufficient specialist expertise to respond quickly to changing rules. Those that do not may find that routine employee movements generate unexpected tax costs, compliance failures and administrative burdens.

In today’s environment, global mobility should be viewed not merely as an HR function but as a strategic business risk requiring ongoing attention from tax, finance and senior leadership teams alike. For Japanese businesses with UK operations, the companies that navigate this complexity effectively will be best positioned to attract international talent, control costs and remain compliant in an increasingly challenging regulatory environment.