Can a Subsidy Be Demanded Back? Repayment Risks and Compliance Red Lines

The answer is both simple and complex. The simple part: as long as you operate in compliance, the subsidy does not need to be returned. The complex part: the definition of "compliance" is very broad, and a single oversight can trigger a repayment obligation. This article takes a practical look at the repayment risks and compliance bottom lines of Japanese subsidies.

The Legal Basis for Subsidy Repayment in Japan

Why Would a Subsidy Be Demanded Back?

The repayment obligation for Japanese subsidies stems from the "Act on Regulation of Execution of Budget Pertaining to Subsidies" (the subsidy grant rules) and the individual subsidy grant regulations of each ministry and agency. Put simply, the government provides a subsidy for your company, but this money must be used strictly in accordance with the approved purpose and conditions. Once a violation is discovered, the government has the right to demand repayment.

Specifically, the triggers for repayment include:

• False declaration: submitting inaccurate information such as the business plan, financial data, or employee count
• Diversion of funds: using the approved subsidy for a non-designated purpose, or diverting it to another business division
• Business discontinuation: after receiving the subsidy, the related business is halted early or substantially downsized within the subsidy period
• Failure to achieve results: for example, the subsidy was intended to increase sales, but sales ultimately fell short of the target
• Tax violations: tax evasion, concealment of income, or similar issues discovered during the subsidy period
• Labor violations: in the case of the Employment Adjustment Subsidy, discovery of illegal employment practices, underpayment of social insurance, etc.

In 2022, the Small and Medium Enterprise Agency of Japan carried out a spot check on 1,743 companies that had received the "Business Revitalization Subsidy," ultimately determining that 1,051 companies (about 60%) had received it improperly and demanding repayment of some JPY 104 billion in total. This case fully illustrates the real threat of repayment.

The Amount and Proportion of Repayment

The repayment amount generally falls into two categories:

1. Full repayment: for serious cases of false declaration or major diversion, the government demands repayment of the entire subsidy amount plus a fine. The fine is generally 20%–50% of the repayment amount.
2. Proportional repayment: if the violation is partial (for example, 30% of the amount was used inappropriately), then the corresponding proportion of the subsidy is repaid. In some cases, late-payment interest (an annual rate of about 6%–8%) must also be paid.

To give a concrete example: a company receives a subsidy of JPY 10 million for new product R&D. However, JPY 3 million of it is used to repay the company's old debt; when the inspection discovers this, repayment of that JPY 3 million is demanded. If repayment is delayed by 6 months, about JPY 90,000 in interest must also be paid (JPY 3 million × 6 months ÷ 12 months × 6%).

A Detailed Look at High-Frequency Repayment Risk Points

The Employment Adjustment Subsidy—The Easiest Trap to Fall Into

The Employment Adjustment Subsidy (雇調金) is the subsidy most frequently used by Chinese enterprises in Japan. During the 2020–2022 pandemic, many companies applied in large numbers, but repayment problems subsequently became frequent.

Common violation scenarios:

Scenario 1: The ghost-employee problem Declaring 50 employees at the time of application when there were actually only 35, but claiming the subsidy through falsified attendance records. Through data cross-checks by the tax authorities and social insurance authorities, the government can easily detect this kind of problem. Repayment risk: 100%.

Scenario 2: A pay raise is not an "adjustment" The purpose of the subsidy is to help a company weather hardship while preserving employment. If, after receiving the subsidy, you instead give employees a 30% pay raise, this indicates that the company is actually in good shape and the subsidy was improperly received. The inspecting body will demand partial or full repayment.

Scenario 3: Unclear records of employees who left during the subsidy period Many SMEs have poorly managed HR. An employee leaves in July, but their records still appear on the August and September attendance sheets. Or an employee is nominally employed but has no attendance record for the entire month. These "inconsistencies" all trigger review.

My advice: if you have claimed the Employment Adjustment Subsidy, be sure to strictly maintain the following documents throughout the entire period you receive the subsidy (usually 12 months):

• Monthly attendance records (consistent with social insurance payment records)
• Monthly pay slips (matching bank transfer records)
• Certificates of resignation and handover records for departing employees
• Written notices of position changes (excluding pay cuts)

The IT Adoption Subsidy—The Budget-Overrun Trap

The repayment risk of the IT Adoption Subsidy (IT導入補助金) comes mainly from overrunning the spending deadline and project changes.

The government-stipulated subsidy usage period (grant deadline) is usually within 12–24 months after the grant date. Many business owners have an unclear understanding of this deadline.

A real case: A Chinese e-commerce company received a JPY 5 million IT subsidy in April 2023 for a system overhaul. The company signed the procurement contract in June, but the system vendor delayed delivery for reasons of its own and did not complete installation until May 2024. The company submitted a completion report to claim the final subsidy in June 2024. The result: it was ruled "over-deadline spending," and the government demanded repayment of JPY 3 million (the portion already paid), on the grounds that it exceeded the subsidy grant deadline.

Risk-control measures:

1. After the subsidy is approved, sign a contract with the vendor immediately, ensuring the contract signing date is within the subsidy grant period
2. Establish a "subsidy project schedule" with a 20% time buffer (e.g., complete within 10 months for a 12-month deadline)
3. If a delay occurs, proactively report it to the subsidy body and apply for a deadline extension (many bodies will grant a 60–90 day extension for a sufficient reason)
4. Keep all timestamped documents for procurement, delivery, and installation (dates on emails, receipts, and invoices)

Start-Up Subsidies—The Business-Downsizing Risk

After receiving a start-up subsidy, the government conducts "follow-up management" of the company for 3–5 years. During this period, your company's size, employee count, and revenue must not shrink substantially, or it will be regarded as "business failure" and repayment will be demanded.

The trigger lines are usually:

• Employee count falls by more than 30%
• Revenue falls by more than 50% year over year
• Net profit is negative for two consecutive years

In 2023, a 5-year tracking survey by a Japanese government body of 800 start-up subsidy companies showed that about 120 companies were required to repay due to downsizing, with an average repayment amount of JPY 6.8 million.

Compliance Red Lines: The Bottom Lines You Must Hold

Truthfulness of Financial Data—The First Red Line

Principle: all financial materials submitted must be consistent with tax filings.

Many Chinese business owners have inconsistent bookkeeping habits—they may keep "two sets of books" (one for the tax authorities, one for themselves), or deliberately adjust data when applying for a subsidy (for example, overstating losses to obtain relief subsidies).

How inspecting bodies cross-check:

1. Comparison with filing data from the National Tax Agency and local tax offices
2. Comparison with actual deposits and withdrawals in bank accounts
3. Comparison with payment records from social insurance authorities
4. Comparison with records in the online invoice system (the invoice system / インボイス制度)

Once an inconsistency is discovered, you must not only repay the subsidy but may also face criminal punishment for subsidy fraud.

Clear Flow of Funds—The Second Red Line

Principle: the subsidy must enter the company account, be used for the purpose the subsidy stipulates, and the entire chain must be traceable.

A violation case: An import-export trading company received a subsidy of JPY 8 million for "market development." The company transferred this money to a certain "affiliated consulting company," claiming to pay consulting fees. The inspection found that this consulting company was actually a shell company run by a relative of the business owner, and the subsidy had in fact been diverted (to pay the owner's personal loan). Repayment: JPY 8 million + a 40% fine + a criminal report.

Preventive practices:

• The subsidy must enter the company's corporate account, not a personal account
• All expenditures must have an invoice or contract as supporting evidence
• When working with outsourcing companies, keep detailed work reports and deliverable documents
• For large expenditures (over JPY 1 million), confirm in advance with the subsidy body whether they fit the subsidy purpose

Labor Compliance—The Third Red Line

Labor compliance is especially crucial for subsidies that include employment support.

Conditions that must be met:

• Employee wages must not fall below the local minimum hourly wage
• Social insurance (employees' pension, health insurance, employment insurance) must be paid in full
• The Labor Standards Act must not be violated (e.g., overtime work, forced overtime)
• Dispatched workers must comply with the Worker Dispatch Act

In 2021, a Japanese convenience-store chain was found to have engaged in "black company" behavior (forced overtime, wage skimming) during the period it received the Employment Adjustment Subsidy. It was not only ordered to repay the entire subsidy (JPY 350 million), but the business owner was also criminally prosecuted.

Repayment-Risk Self-Assessment Checklist

Please check yourself against the following 20 questions one by one. If any single item is answered "No" or "Not sure," it means there is a potential repayment risk:

| Check Item | Compliant? | |---------|--------| | The financial data at the time of subsidy application is fully consistent with tax filings | □ Yes □ No | | The entire subsidy entered the company's corporate account | □ Yes □ No | | All subsidy expenditures have original evidence such as invoices and contracts | □ Yes □ No | | Employee wages during the subsidy period were not below the local minimum hourly wage | □ Yes □ No | | The social insurance and tax deductions for all employees are fully compliant | □ Yes □ No | | Attendance records fully match the pay-slip data | □ Yes □ No | | The business stipulated by the subsidy was never interrupted or substantially altered | □ Yes □ No | | All procurement and installation completion dates fall within the subsidy grant deadline | □ Yes □ No | | All subsidy-related documents (contracts, invoices, reports, etc.) have been kept | □ Yes □ No | | The subsidy has never been diverted to a non-designated purpose | □ Yes □ No | | The content of the subsidy declaration has never been altered | □ Yes □ No | | No business information has been concealed from the subsidy body | □ Yes □ No | | The company's continuity records (corporate registration, business license) are complete and intact | □ Yes □ No | | The company has never been penalized by the National Tax Agency or local tax office for any reason | □ Yes □ No | | The company's employee count did not fall by more than 20% during the subsidy period | □ Yes □ No | | The company's revenue did not fall by more than 30% during the subsidy period | □ Yes □ No | | All transactions with subsidiaries and affiliated companies are fully independent and reasonable | □ Yes □ No | | A dedicated staff member maintains the accounting records for the subsidy project | □ Yes □ No | | A subsidy-compliance self-check is performed every month | □ Yes □ No | | A subsidy archive has been established, keeping all related documents for more than 3 years | □ Yes □ No |

Frequently Asked Questions (FAQ)

Q1: If the subsidy has already been received and spent, but I suddenly find that a certain expenditure does not comply with the subsidy rules, what should I do?

A: This is a very common problem, and there are remedies. First, immediately stop further spending to prevent the problem from expanding. Then, proactively report the issue to the subsidy grant body—this is the key step. In Japan's subsidy system, the difference in penalty severity between "proactive declaration" and "passive discovery" is enormous. The former usually only requires repayment of the non-compliant portion, while the latter may require full repayment plus an additional fine.

Specific steps: submit a "correction report" (修正報告書) to the subsidy body, detailing which expenditure is non-compliant, the amount, the reason, and how it will be corrected. It is advisable to also attach a legal opinion (issued by a professional subsidy advisor or lawyer). After seeing a company's proactive and sincere attitude, many bodies will grant an extension of the repayment deadline or allow repayment in installments. There is a real case: a company had a JPY 500,000 non-compliant expenditure in an IT subsidy; after proactively reporting it, it was allowed to repay in 4 installments over 12 months—whereas if it had been caught, immediate lump-sum repayment plus a fine would have been demanded.

Q2: My company applied for a subsidy due to the impact of the pandemic, but business has now recovered. Will it be deemed that I "should not have received the subsidy" and be required to repay?

A: This involves the question of "truthfulness" at the time of the subsidy application. If, at the time of application, your company genuinely met the eligibility conditions (for example, a sales decline of more than 30%), then generally you will not be required to repay simply because business later improved. The subsidy is approved based on the situation at the time of application, not on the after-the-fact result.

But there is one important premise: the information on your application form must be truthful. If you deliberately overstated losses in order to "cheat the subsidy," and later a healthy business gives you away, that is a problem. The inspection department will compare the financial data at the time of application with the actual tax-filing data.

However, if the subsidy comes with a "business continuation obligation" clause (many government subsidies do), then you must maintain the business scale from the time of the subsidy for 3–5 years afterward. If you substantially downsize in between, there is still a repayment risk. Advice: keep all the materials from the time of application, able to prove the business conditions at that time. Also, maintain relative stability of the business during the subsidy period.

Q3: After a subsidy is demanded back, can it be repaid in installments? Will interest accrue?

A: In most cases, the government demands immediate lump-sum repayment. But if the company proactively applies for installments, many bodies will agree—this depends on the repayment amount and the company's financial condition. The usual installment plan is 2–3 installments within 6 months, or 4 installments within 12 months.

The interest issue is crucial. Under the subsidy rules, the interest on the repaid amount is usually an annual rate of 6%–8%, calculated from the day after the original payment deadline. For example, if it should have been paid in June 2024 but was delayed until December 2024, you must pay 6 additional months of interest. Some local subsidies do not accrue interest; this depends on the specific subsidy grant rules.

My advice: if you face repayment, be sure to consult the body about the possibility of installment repayment within 30 days of receiving the repayment notice, and request written confirmation. Also, keep the transfer receipt for every installment in case of a later dispute.

Q4: If I have multiple branches or affiliated companies, and one of them commits a subsidy violation, will the other companies be dragged in too?

A: The answer to this question depends on the "independence" between the companies. If they are fully independent corporate entities (with independent corporate representatives, corporate seals, and independent bank accounts), then in principle one company's violation will not directly affect another.

But there is "collateral involvement" in the following situations:

1. Commingling of funds: if Company A's subsidy is transferred to Company B's account and used there, the inspecting body will determine that both companies' subsidies are problematic.
2. The same person represents multiple companies: if you are the representative or major shareholder of several companies, the inspection will comprehensively review the finances of all the companies to see whether there is overall fraudulent behavior.
3. Unreasonable related transactions: if the transaction prices between Company A (which received the subsidy) and Company B (your affiliated company) deviate severely from market prices, this will be regarded as "disguised diversion of the subsidy."

Prevention: strictly separate the accounts of each corporate entity. If there are related transactions, they must be conducted at market-based, independent prices, with formal contracts signed. Keep all evidence that the two companies operate independently (corporate seals, independent HR, independent finances, etc.).

Q5: When applying for a subsidy, can I conceal some of the company's "sensitive information" (such as small fines or civil disputes) to increase the chance of approval?

A: Absolutely not. This constitutes the crime of "subsidy fraud," and the consequences are extremely serious. Japan's legal provisions on subsidy fraud are very strict; under the "Act on Regulation of Execution of Budget Pertaining to Subsidies" and related criminal law, deliberately concealing information to claim a subsidy is fraud, punishable by imprisonment of up to 3 years or a fine of up to JPY 3 million, and the corporate entity may be additionally fined 10 times the repayment amount.

When reviewing, the inspecting body will look into:

• The company's tax history and penalty record
• Violation records from labor authorities
• Civil litigation records from the courts
• Criminal records from the police

If you conceal this information, once it is discovered (and it almost always will be), you must not only repay the entire subsidy but also face fines and criminal liability, and the company's credit will be utterly destroyed.

The correct approach: when applying, report all questionnaire and form information truthfully. If you have concerns, consult a professional subsidy advisor before submitting; they will help you judge whether the information affects approval. Honest declaration, even with minor issues, usually will not lead to outright rejection—but concealment will certainly lead to serious consequences.

A Full-Process Plan to Prevent Subsidy Repayment

Pre-Application Phase

1. Conduct a compliance audit: before applying, engage a professional advisor to review the company's financial, labor, and tax status, ensuring there are no hidden risks. The cost is about JPY 50,000–150,000, but it can avoid a repayment risk of millions of yen later.

2. Prepare complete supporting documents: including the corporate registration certificate, financial statements (the last 3 years), tax filings, social insurance payment certificates, employee rosters, etc. All documents should be cross-checked to ensure the data is consistent.

3. Assess your ongoing sustaining capacity: many subsidies come with a "business continuation obligation." Before applying, assess whether you can maintain the business scale from the time of application over the next 3–5 years. If you cannot, do not apply for this kind of long-obligation subsidy.

During the Application Phase

1. Report all information truthfully: any false statement can lead to serious consequences. If uncertain, consult the subsidy body directly.

2. Keep all application materials: the submitted application, list of documents, communication records, etc. should all be properly preserved—these are key to proving truthfulness later.

3. Clarify the subsidy's grant deadline and usage conditions: once approved, immediately organize key information such as the grant deadline, scope of use, and reporting requirements into a "subsidy project management table" and share it with the finance, HR, and other relevant departments.

Post-Award Phase

1. Set up an independent accounting account: create a dedicated account for the subsidy project in the books, and record all related expenditures under this account for easy verification later.

2. Establish a "subsidy project archive": collect all subsidy-related documents—contracts, invoices, receipts, work reports, acceptance certificates, etc.—numbered and organized in chronological order, and keep them for at least 3–5 years.

3. Conduct a monthly self-check: have the finance staff check each month whether expenditures fit the subsidy purpose, whether the evidence is complete, and whether the amounts are accurate. Detect problems early and correct them early.

4. Establish a subsidy project schedule: mark key nodes such as the subsidy deadline, spending plan, and completion time on a calendar. If a possible delay is detected, report it to the subsidy body in advance.

5. Report to the subsidy body regularly: most subsidies require periodic (e.g., semi-annual or quarterly) progress reports. Do not wait until the last minute to report. Regular, proactive communication can greatly reduce the risk of problems being discovered later.

Response Strategy When Notified of Subsidy Repayment

If you unfortunately receive a "repayment notice" from the subsidy body, don't panic—it can be handled:

Step 1 (within 3 days of receiving the notice): contact the subsidy body and request a written explanation of the specific reason for repayment. Don't rush to repay; first understand why the body determined you were in violation.

Step 2 (within one week): engage a subsidy legal advisor to analyze whether the body's determination holds up. In some cases, the company is actually compliant and the body has simply misunderstood.

Step 3 (within two weeks): submit a "written statement of defense" (弁明書), explaining in detail why you believe you are compliant. Attach supporting evidence (contracts, invoices, work reports, etc.).

Step 4: if the body insists on repayment, seek installment repayment terms and interest concessions.

Step 5: complete repayment before the repayment deadline, and keep the transfer receipt.

Step 6: if you believe the body's decision is unfair, you can raise an objection with a higher authority (such as the Board of Audit).

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Conclusion: Subsidies—Usable, but Handle with Care

Japan's subsidy system is an important policy of support for SMEs. But the premise of that support is honesty and compliance. Receiving a subsidy is not a "free lunch"—it is a "promise" with the government: you use this money to do what you committed to, and the government lets you use it. Break the promise, and repayment is inevitable.

For Chinese business owners in Japan, the recommended golden rules are:

1. Before applying: do a thorough compliance audit
2. During application: all information truthful and accurate
3. After receiving: use strictly according to the rules, self-check regularly
4. When reporting: timely, proactive, and detailed
5. Afterward: properly preserve documents and prepare for traceability

That way, the subsidy will become a reasonable, lawful, and worry-free boost to the company's growth.

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If you have any questions about the compliance of your subsidy, or you are facing the risk of subsidy repayment, you are welcome to a free consultation. Our professional team can help you comprehensively assess the risks, develop a compliance plan, or defend you when a repayment notice arrives.

Book a free 30-minute subsidy compliance diagnosis now—scan the QR code below or reply "subsidy consultation."