How should we determine how much would be our executive remuneration?
★ Explanation ★
1. From a taxation standpoint (corporate tax and income tax)
If the owner (100% shareholder) executive are not the same person, the owner generally sets the amount of executive compensation to a reasonable amount in accordance to the contribution of the officer or lower. For the executive, it is not impossible for them to prefer a higher amount.
On the other hand, if the owner and the executive are the same person, the money reserved for the corporation and for the individual executive are generally the same, so it is reasonable for the compensation to be an amount that will minimize the taxes due.
As mentioned in Q111, the substantial tax rate on corporate income in Japan, in other words, the effective tax rate, is approximately 30%. On the other hand, the tax rate for personal income is said to be 0% to 55%. Therefore, if the tax rate on personal income exceeds 30% and if executive compensation is such a high enough amount that would result in a collective tax rate of 50%, you would end up paying a lot of taxes by combining the corporation and the individual.
Therefore, from the viewpoint of corporate and income taxes, assuming that the amount of income of the corporation and individuals can be adjusted, it is possible to reduce the amount of taxes to be paid as less as possible by making the amounts of compensation of corporate taxes and income taxes almost the same.
In addition, executive compensation may vary depending on the amount of income deductions resulting from personal welfare. Generally speaking, to make the corporate tax and income tax rates roughly the same, consider 18 to 24 million yen a year.
2. When considering salary guarantee contracts
In the case of a Japanese-based representative of a foreign company, salaries are often guaranteed to be the same level even after computing income tax and resident tax, as well as personal contributions to social insurance premiums. This kind of guarantee may be stipulated in a “salary guarantee contract” for “expats” ― representatives of foreign-affiliated companies in Japan. When calculating their wages, simulations are performed many times, where it is assumed that the Japanese company will bear the income tax, resident tax, and social insurance premiums, resulting in a gross up payroll to cover such costs.
Every so often when foreigners are appointed as officers or hired as employees, there are cases where you can get into trouble about the amount of compensation whether is it at par value or is the net income. As such, it important to understand that there is a custom of guaranteeing compensation on a net income-basis overseas.
3. When considering Business Manager visa renewal
During the examination for the Business Manager visa, one can see the applicant’s management stability and consistency, so profitability management is especially important. However, do take note that one should not reduce the executive’s compensation for the sake of reducing expenses and making a profit. It is necessary to formulate and execute a business plan so that at least about 200,000 yen can be secured on a monthly basis.
In other words, for a foreign owner, the company is linked to the individual. The Immigration Bureau sees both the company and the individual applicant as a set, so it is important to take both entities into consideration. While this is in-line with the financial review perspective of Japanese financial institutions, “the company’s profits + executive compensation” is what is considered the company’s true strength. As such, when applying for a renewal of the business manager visa, take into consideration the combined values of the company’s profits and directors’ remuneration.
While it may be difficult to live in Tokyo with a monthly salary of 200,000 yen, when compared to the salaries of fresh graduates, it is not considered impossible to maintain a living in Tokyo with that salary. This is why the standard minimum remuneration is 200,000 yen. The higher the number, the higher the rating during the renewal process of the business manager visa.
4. Fixed Regular Salaries
In Japan, when thinking about executive compensation, there is a concept of “fixed regular salaries” for executives.
Salary revisions for executive remuneration that do not fall under any of the conditions stated above may not be considered tax-deductible.
If the executive compensation revision was made within three months from the closing date, it will be recognized as fixed regular salary even if the revised salary was paid from the fourth month onwards. In addition, because it was within three months, even if it was revised from the month following the closing date, it will be recognized as the fixed regular salary.
For example, in the case of a company whose year-end is in in December, a general meeting of shareholders will be held within three months from the closing date and the salary revisions for executive remuneration will be made. Salary revisions may occur somewhere between January to April.