Incentive Bonus payment to directors of Japan subsidiary

Under the Japanese corporation tax law, directors' remuneration should be "Fixed monthly salary" to be a tax deductible.

Incentive bonuses to be paid to directors are not tax deductible. This cause additional cash out if corporation tax is additionally charged onto Incentive bonuses.

1. There are two ways to pay remuneration to be a tax deductible other than "Fixed monthly salary".

1) Fixed payments in accordance with an advance notice to the tax office; and
2) Performance bonuses paid in proportion to the company’s earnings to directors who engage in the
operation of the company’s business.

However,
1) is not match the intention of an Incentive bonus and
2) is only applied to paid to directors who engage in the operation of the company’s business and
the company (excluding family companies or group subsidiary companies).

2. Provision method of the incentive bonus which becomes realistic to be tax deductible.

[Basic salary of the current year + incentive bonus of the previous period] / 12 months could be a “Fixed monthly salary” which should be approved by a General shareholder's meeting within a 3 month from the accounting year end.

3. Alternative way to pay Incentive bonus to staff of Japan subsidiary.

Ministry of Justice announced on 16 March 2015 that representative director of Japan company can be non resident of Japan. Before that at least one of Japan resident was required as a representative director.

Now all staff of a Japan subsidiary can be non-director so that their incentive bonus could be a tax deductible??

(Note) To avoid any PE risk for Japan subsidiary, you should ask tax advise for a licensed tax accountant.

4. Review is necessary from the business perspective.

You should compare pros and cons form the business perspective before introduce a new director position.

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