Effective Ways to Reduce Taxes When Running a Business in Japan – Part 2

Hi, my name is Taisei Koshida. I am a certified public accountant and licensed tax accountant in Japan.

I support foreign business owners and entrepreneurs with accounting, tax filings, and corporate tax planning in Japan, including support in English.

If you operate a company in Japan, there are several legal ways to reduce the combined tax burden of the company and its owner.

In this article, I explain three practical tax planning methods: using company housing for the president, paying reasonable business travel allowances, and appointing family members as directors.

Your Company Leases the President’s Residence

Your company can enter into a lease agreement with the landlord for the president’s residence and then provide the residence to the president as company housing.

The rent paid by the company can generally be treated as a company expense. If the president pays the company at least the required rental equivalent amount under Japanese tax rules, the difference is generally not treated as additional salary income to the president.

For a residence leased by the company from a third party, the required rental amount is generally the higher of 50% of the rent paid by the company or the amount calculated under the statutory formula.

Special rules apply to so-called luxury company housing. For example, a residence with a floor area exceeding 240 square meters may be treated as luxury housing depending on factors such as rent, acquisition value, interior specifications, and facilities.

Because the company can deduct the rent while the president may avoid additional salary taxation if the rules are properly followed, company housing can be a highly effective method of tax reduction in Japan.

Your Company Provides a Travel Allowance to the President

If your company pays reasonable travel expenses or a business travel allowance to the president, the payment can generally be treated as a company expense and may also be non-taxable to the president personally.

However, the amount must be reasonable and necessary for the business trip.

If the company pays an excessive travel allowance, the tax office may deny part of the company’s deduction or treat the excessive amount as taxable salary income to the president.

Therefore, it is important to establish reasonable travel expense rules and apply them consistently.

Hiring Family Members, Such as Your Wife, as Directors in Your Company

If a family member, such as your wife, actually works for your company, appointing her as a part-time director and paying reasonable director compensation may help distribute income within the family.

For example, if she receives JPY 80,000 per month, her annual salary would be JPY 960,000.

Under the current Japanese income tax rules, if a spouse has only salary income, salary income of up to JPY 1.23 million may still fall within the income limit for the spouse deduction, provided the other applicable requirements are met.

At the same time, the company may be able to deduct the director compensation if it satisfies the corporate tax requirements for deductible director remuneration.

This can reduce the company’s taxable income while also distributing income between family members, potentially reducing the overall tax burden of the household.

However, the compensation must be reasonable in light of the actual work performed, and director remuneration is subject to specific corporate tax rules.

If you have not read Part 1, you may also find the following article helpful:

Effective Ways to Reduce Taxes When Running a Business in Japan – Part 1

Accounting and Tax Support for Foreign Business Owners in Japan

Koshida Accounting and Tax Office provides accounting and tax services in Japan for foreign entrepreneurs, business owners, and small companies.

We provide English support for accounting, tax filings, tax reduction strategies, and corporate tax planning in Japan.

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If you are looking for an accounting firm in Japan or would like to discuss legal ways to reduce your company’s tax burden, please feel free to contact us through the inquiry form.