The goals of our Japan Compensation Planning practice include the following:
- Structuring tax efficient compensation packages that serve to motivate Japan assignees but without subjecting them to unnecessary Japan side tax.
- Ensuring that compensation packages are consistent with local practice in Japan.
- Assisting foreign management to understand the true total cost associated with compensating employees in Japan.
- Identifying director related issues. In cases where an individual may become the director of a Japanese company, our team seeks to mitigate adverse tax consequences for both the company and the individual.
Key Elements of Japan Compensation Planning
Our Compensation Planning group will begin its work by considering the goals of the company and the employee’s specific circumstances. Important issues that need to be considered in structuring most compensation packages will include the following:
1. Location of Payroll
An important initial decision is the location of payroll for international assignees. In many cases it will make sense for international assignees to be paid off-shore. This means that compensation will be paid from outside to Japan to an employee bank account located outside Japan.
Where compensation is paid off-shore, the employee will usually need to submit a Japanese individual income tax return by 15 March each year. Our Japan Individual Tax Practice is able to assist in this regard.
2. Japanese Statutory Benefits
Japan has a system of statutory benefits that includes the following items:
- Social Insurance
Where compensation is paid outside Japan it may not be possible for foreign assignees to participate in these schemes in the same manner as normal Japanese employee.
3. Specific Benefits
There are a number of tax efficient benefits that are commonly included in Japanese compensation packages. These include company provided housing, home leave, and reimbursement of relocation expenses. In addition, a nearly universal benefit to employees of Japanese companies is reimbursement of daily commuting expenses.
4. Issues Related to the Compensation of Directors In Japan
Director status in a Japanese company is associated with adverse tax consequences for both the individual and also for the company.
Common director related issues include the following:
Corporate tax issues
Bonus payments to directors (defined very broadly for Japanese tax purposes) are generally non-deductible for Japanese corporate tax purposes. This is particularly relevant to performance incentives which are often a key component of compensation packages for senior executives.
This article provides additional information regarding Issues in Structuring Compensation for Directors of Japanese Companies.
Individual tax issues for Directors of Japanese companies
Individuals with director status in Japanese companies may suffer adverse tax treatment in a number of ways. This includes:
Inability to apportion Japan taxes
Foreign employees may benefit from a reduction in their Japanese taxes based upon days spent outside Japan on business (this is often referred to as the Days-in-Days-out benefit). However, such reduction may not be available to individuals who have director status.
Taxation of specific benefits
Some specific compensation items are less beneficial for individuals with director status. For example, company provided housing (a key benefit for many expats) is significantly less beneficial for directors.
Japan Visa is able to assist with possible solutions to these director specific problems. In appropriate circumstances this may include use of our Japan Nominee Director Service.