Under the Japanese tax law, directors’ salaries are not deductible.
Directors can determine their own salaries by themselves, so directors’ salaries are often used for tax evasion.
Let me explain you an example.
There are two types of taxes you need to pay when you are running your company.
1. Corporate income tax (Fixed tax rate, 23.4%)
2. Personal income tax (Progressive tax rate, 5% – 45%)
Increase directors’ salaries = Shift profits from the company to the individuals (Save corporate tax)
Decrease directors’ salaries= Shift profits from the individuals to the company (Save personal income tax)
Therefore, the following two criteria must be satisfied to treat the directors’ salaries as deductible expenses.
1. Directors’ salaries must be monthly fixed amount
2. Directors’ salaries need to be determined within 3 months from the beginning of the fiscal year.
How about directors’ bonus? Directors’ bonus are not deductible under the Japanese tax law. However, if you report the amount of directors’ bonus to the tax office in advance and pay the directors’ bonus as reported, the directors’ bonus can be treated as deductible expenses.
To minimize your tax, it is very important to estimate annual income from your business and set the most tax effective amounts for directors’ salaries.
Since the estimation is complicated, I recommend you to contact with tax accountants before you start your business in Japan.