Treatment of executive payroll under the corporate income tax in Japan

Because executive payroll can easily be used to arbitrarily adjust taxable income, the conditions for deductibility in corporate tax calculations are strictly defined. The term “executive” here refers to a registered officer under the Corporate law in Japan.

As a general rule, salaries paid to executives are deductible only in the following 3 cases; otherwise, they are not deductible.

1. Same amount every month

If the exact same amount is paid each month, the executive payroll can be included in deductible expenses, and the amount paid can be revised only in the following 3 cases.

  • Revisions made before the end of 3 months from the beginning of the fiscal year, limited to once per fiscal year.
  • When there is a change in the officer’s position in the organization or a significant change in the duties of the officer.
  • Revision of salary reductions due to a significant deterioration in the company’s performance.

2. Bonuses noticed to the tax office in advance

In addition to a fixed monthly salary, bonuses that are notified in advance to the tax office can also be included in the amount of deductible expenses.

There is a deadline for notification, which is either one month after the date of the resolution of the shareholders’ meeting or four months after the beginning of the fiscal year, whichever is earlier.

In other words, the advance notification salary is a system in which the amount and timing of payment are determined in advance near the beginning of the fiscal year, and as long as the payment is made in accordance with the notification, there is no room for profit manipulation, and therefore, the amount can be included in deductible expenses.

Performance-based salary

Salaries calculated on the basis of profits or the market price of stocks, which indicate the company’s performance, may also be deductible if certain requirements are met.

The use of this system is not permitted for family-owned companies, and strict requirements are imposed, such as the fact that the salary must be paid equitably to the executive officers and that the details of the calculation method must be included and disclosed in the annual securities report. In practice, the use of this system is limited to listed companies.

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