Japan Compensation Planning Services

Overview

The goals of our Japan Compensation Planning practice include the following:

  • Structuring tax efficient compensation packages that serve to motivate Japan assignees and avoid 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. This article discusses Compensation Issues For Directors of Japanese Companies.

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:

A. 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.

B. Japanese Statutory Benefits

Japan has a system of statutory benefits that includes the following items:
  • Social Insurance: The Japan social insurance scheme covers matters such as national health insurance and national retirement scheme.
  • Labor Insurance: The Japan labor insurance scheme covers unemployment insurance and workers accident 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.

C. 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.

D. Issues Related to the Compensation of Directors In Japan

Director status in a Japanese company can be associated with adverse tax consequences for both the individual director 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.
  • Individual tax issues for Directors of Japanese companies
    Individuals with director status in Japanese companies may suffer adverse individual tax treatment including:
    • Inability to apportion Japan taxes
      Foreign employees can generally 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.

This article discusses Compensation Issues For Directors of Japanese Companies.

JAPAN VISA™ is able to assist with possible solutions to these director compensation problems. In appropriate circumstances this may include use of our Japan Nominee Director Service.

Contact JAPAN VISA™ to learn more about our Japan employee benefits and HR Services.

The above is provided for general information purposes only and does not constitute advice to undertake or refrain from undertaking any action. Only qualified Japanese professionals are able to advise on Japan immigration, legal, and tax matters.