Laws and Regulations in Offshore Development: Key Considerations

October 15, 2025

In offshore development, projects are carried out in collaboration with overseas developers. To avoid problems, it is essential not only to understand differences in language and culture but also to be aware of local laws and regulations. This article outlines some of the legal considerations involved in offshore development.

Offshore development refers to outsourcing development work to foreign companies or local subsidiaries abroad. Broadly defined, offshore development may also include infrastructure setup and maintenance tasks, not just software development.
Offshore development is increasingly gaining attention worldwide as a means of securing talent, boosting development capabilities, and reducing costs by outsourcing to countries with lower labor costs.

There are two main types of offshore development contracts: team (known as “Lab-Type” in Japan) and fixed-scope (deliverables-based) contracts. Below is an explanation of each:

2-1. Team Contracts (“Lab-Type Contracts”)

With a team contract, engineers are assigned to your project for a fixed period. Unlike contracts signed per project, this model allows you to have a dedicated offshore team throughout the contract period. It’s suitable for mid- to long-term engagements and offers flexibility for specification changes.

2-2. Fixed-Scope Contracts

Fixed-scope contracts define specific deliverables and timelines at the time of signing. They are usually shorter-term and signed per project. Once the project ends, the team is typically dissolved.

Laws reflect a country’s culture and values, meaning legal rules vary widely between countries. Offshore development is no exception: legal and regulatory frameworks often differ significantly between Japan and the offshore country.

Before engaging in offshore development, it’s crucial to research the local laws of your partner’s country. Agreeing in advance on applicable rules and reflecting this in the contract is key to preventing disputes.

There are five main legal points to watch out for:

4-1. Governing Law

Clarify which country’s laws will govern the contract. Reaching mutual agreement is essential for avoiding legal issues.

4-2. Jurisdiction

In case of disputes, determine in advance which country’s court will have jurisdiction. Note that if the governing law and court jurisdiction differ, enforcing a judgment could become difficult.

4-3. Employment Systems

When hiring local staff through the offshore partner, be sure to understand the local employment laws. Applying your country’s HR practices without adaptation can result in legal violations. If you’re hiring directly in Japan without a foreign subsidiary, Japan’s foreign labor regulations may apply.

4-4. Ownership of Deliverables

Clarify who owns the deliverables, including copyright and intellectual property. Typically, the client retains rights, but sometimes the offshore partner may hold partial rights. Clearly define ownership in the contract. Some countries also require specific legal language for copyright transfer, so verify local requirements.

4-5. Data Protection and Privacy

Offshore projects often involve sharing sensitive internal information. As data protection laws vary by country, understanding the legal landscape is vital. Also, countries differ in their security awareness — check the offshore partner’s security systems and include clauses on handling confidential information in the contract.

5-1. Generally Not Required

Under Japanese law, outsourcing to foreign entities generally does not require withholding tax. However, international tax treaties take precedence. Japan applies the OECD Model Tax Convention, but be cautious if your offshore partner is in a non-member country.

5-2. Depends on Copyright Transfer

If the deliverables (like software) are subject to copyright and the rights are transferred, withholding tax may be required in Japan. As requirements vary by case, consult a tax expert if you’re unsure.

5-3. Required for India

Under Japan-India tax treaties, payments for development work performed in India are subject to withholding tax. If you file the proper tax treaty notification, the rate is 10%. Without it, the rate increases to 20.42%.

Legal concerns aren’t the only challenges. Here are some other common problems:

6-1. Quality of Deliverables

Deliverables may not match requirements or quality expectations. In Japan, ambiguous instructions might still be interpreted in your favor, but to be safe, give clear and specific guidance. Avoid assumptions and be explicit.

6-2. Missed Deadlines

Some countries have a more relaxed attitude toward deadlines, leading to schedule delays. Unplanned development tasks may also cause setbacks.

6-3. Communication Failures

Language barriers often lead to misunderstandings. Also, cultural and business practice differences mean that what’s considered obvious in Japan may not be understood abroad. Adapt your communication style: use simple, clear language and confirm mutual understanding.

Here are four factors to consider:

7-1. Country Differences

Understand legal systems, language, culture, time zone differences, and labor cost levels.

7-2. Development Track Record

Check if the offshore vendor has developed products similar to yours. Review their portfolios for scale, timeline, and how they handled issues.

7-3. Engineer Skill Levels

Confirm the offshore team has the necessary skills and training. Investigate the local education system and certifications as well.

7-4. Management Systems

Understand how the vendor manages teams. With team contracts, verify team stability and productivity. Also, check their systems for project tracking and quality control.

Follow these general steps:

8-1. Discuss Requirements and Specifications

Start by outlining your challenges and product goals. If possible, prepare detailed internal designs to streamline project launch.

8-2. Decide on Contract and Development Models

Choose between team vs. fixed-scope contracts, and select waterfall vs. agile development based on your needs.

8-3. Review Estimates and Sign the Contract

Request estimates from several vendors and compare. It’s better not to limit yourself to one company from the start.

9-1. Include All Essential Items in the Contract

A well-drafted contract protects both parties. Key items to include:

• Deliverables
• Scope of work
• Compensation, currency, and exchange rate
• Progress reporting frequency
• Deadlines
• Engineer skill requirements and headcount
• Security provisions
• Governing law

9-2. Secure Language-Skilled Staff

If you lack in-house language capability, arrange for a bilingual staff member.

9-3. Establish Clear Rules for High-Risk Areas

Anticipate potential issues in communication or quality. Address these risks during the contracting phase by establishing clear protocols.

Offshore development laws vary by country. Be sure to understand the legal and regulatory landscape of your outsourcing destination. When signing contracts, clarify governing law and jurisdiction to prevent future disputes.

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