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Officer’s salary for tax purposes (Directors, Auditors, Liquidators)

Posted on 07/11/2012 by Koji Takahashi

Case 13

<Question>
I have just started a business in Japan and my tax accountant advised me to decide on the officer’s salary, however, I do not know how it should be decided. According to the accountant, it is important for tax purposes. I am thinking about keeping the director’s salary low at first and then increasing it if the company starts recording a profit to certain extent. Is this a viable option for tax purposes?

<Answer>
Compensation paid to officers of Japanese companies is subject to different rules from salaries paid to employees. Officers of Japanese corporations include directors, auditors and liquidators.

Salary is defined as a continuous payment, based upon a predetermined standard and computed for a period of one month or less. Therefore, it is difficult to change the predetermined salary during the period to be included in the expense. Salaries paid to officers are generally deducted by corporations, but salaries that are of an unreasonable amount may not be deducted. Compensation to officers in excess of that which is specified in the articles of incorporation or which is decided at the shareholder meeting is not deductible. Officer’s salaries are categorized as follow.

Officer’s salary

1.    Fixed regular (monthly) salary
This salary is paid monthly by a fixed amount based upon the shareholders meeting. Except in special circumstances it must be paid by a fixed amount, so if it is changed without substantial reason such as a serious deterioration of business, the salary is not deductable.

2.    Predetermined salary
This salary is paid based upon the application form of a predetermined salary to the tax authority. For example, if some officers would like to have some compensation when bonuses are paid to employees, this salary is deductable for tax purposes as long as the application form of the predetermined salary is filed a month after the shareholders meeting.

http://www.nta.go.jp/tetsuzuki/shinsei/annai/hojin/pdf/5104_2.pdf

(Example)

Annual salary: JPY 10,000,000
Fixed regular salary: JPY 650,000 ⇒Total JPY 7,800,000
Predetermined salary: JPY 1,100,000 (Paid during the summer bonus period)
JPY 1,100,000 (Paid during the winter bonus period)

3.    Profit-based compensation
Primarily, this salary is available on condition that companies are listed companies in the stock market, and also they have to meet several other requirements. Therefore, we won’t go into details at this time.

Q&A case

When a business is just started, the officer’s salary has to be decided within 3 months from the establishment. As mentioned in the above, the officer’ s salary has to be paid by a fixed amount, so if it is changed during the period, the increased salary is not deductable for tax purposes since it makes it possible to make an adjustment of profits.

Therefore, it is quite important to prepare the business forecast and pay the salary based upon the forecast. If the business result did not achieve the forecast and it is difficult to pay the decided salary, recording the accrued salary is permitted as long as it is paid later.

Example of changing officer’s salary

Q& A of the officer’s salary released from the tax authority explains the details of a change in officer’s salary with illustrations. If you need to change the salary, asking your tax accountant is recommended case by case.

1.    Increased salary at the shareholders meeting (increase)

2.    Increased the salary during the period without specific reason
A decision was made in the shareholders meeting to change the salary in June, and the change was implemented the following month of the shareholders meeting.

(1) The change was implemented without a decision from the shareholders meeting the following month of the meeting.
(2) Even though a decision was made at the shareholders meeting to change the salary in June the change was not implemented in the following months.

Both of case, the increased salary is deductable.

3.    Increased during the period
No decision was made to increase the salary at the shareholders meeting though, a representative director was changed to other directors, and the new representative director’s salary was increased.

The increased salary is deductible.

4.    Decreased the salary due to a serious deterioration
No decision was made to decrease the salary at the shareholders meeting though,  a decision to decrease the salary was made in the extraordinary shoreholdings meeting due tue a serious deterioration.

The decreased salary is deductible.

5.     Decreased the salary due to anxiety of business performance or cash schedule
No decision was made to decrease the salary at the shareholders meeting though, a decision to decrease the salary was made in the extraordinary horeholdings meeting due to anxiety of business performance or cash schedule.

The decreased salary  is not deductible.

 

By Certified Public Accountant (CPA) & Tax Accountant, Koji Takahashi,
Tokyo & Yokohama