Q85:How much should we set for executive compensation?

A: To all of you considering business expansion in Japan, we are here to support your journey! Let me address your question about setting executive compensation.

Commentary from a Japanese tax accountant

Firstly, when determining executive compensation, it is crucial to consider corporate tax, income tax, social insurance, and visa renewal comprehensively.

From the perspective of corporate and income tax, it is vital that the executive compensation is set at an appropriate amount. If the compensation is too high, the tax burden increases, so it's important to adjust the corporate and personal income amounts to minimize tax liabilities. The corporate tax rate in Japan is about 35%, and the personal income tax rate ranges from 0% to 55%. Typically, executive compensation is set so that the effective tax rates of corporate and personal income taxes are roughly equal. A ballpark figure would be around 11 million yen per year.

From the perspective of guaranteed net salary contracts, in the case of expatriates at foreign-owned enterprises in Japan, the compensation is often guaranteed on a net basis. When calculating a net-based salary, it is assumed that the company in Japan will bear the income tax, resident tax, and social insurance premiums, adjusting the salary accordingly. It's common in international contexts to guarantee net-based compensation, so consider this when setting salaries.

Regarding visa renewal, for the "Business Manager" visa review process, the stability of the business and the level of executive compensation are emphasized. A minimum of about 200,000 yen per month in executive compensation is typically required. Higher compensation levels can enhance the evaluation in the renewal of the "Business Manager" visa, making appropriate compensation setting crucial.

Finally, when revising executive compensation, it is important to pay attention to the concept of "fixed periodic salary," which refers to a salary where the timing and amount of payment are consistent. When revising executive compensation, it's important to schedule the revision period according to this concept and proceed with the appropriate procedures.

These are the points to consider when setting executive compensation. If you have any questions or need consultation about business expansion in Japan, our tax accountants in Japan can support you in English. Please feel free to contact us.

Japanese Certified Public Accountant ・English-speaking Japanese tax accountants Hiroya Aihara
Ringo Tax Corporation

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