Hello, my name is Taisei Koshida, and I am a certified public accountant and tax accountant in Japan.
I assist foreign business owners with accounting and tax matters in Japan, especially those who may have difficulty dealing with Japanese accounting and tax procedures.
When starting a company in Japan, one important decision is how much compensation to pay the directors. Director’s compensation affects not only corporate tax but also the company’s cash flow and financial results.
In this article, I will explain some important points to consider when setting director’s compensation in Japan.
How Much Profit Can You Expect in the First Fiscal Year?
One important factor in setting director’s compensation is how much profit you expect the company to make before paying the compensation.
When starting a company in Japan, showing a profit in the first fiscal year may be helpful for various reasons, such as future bank financing, visa renewals, and relationships with potential clients.
Therefore, it is generally a good idea to set director’s compensation at a level that does not put too much pressure on the company’s financial results.
How Much Money Do You Need to Live?
Another important consideration is how much money you need for your personal living expenses.
For example, if you set your monthly director’s compensation at 100,000 yen when you actually need 500,000 yen and regularly withdraw the shortfall from the company, this could create accounting issues and may also give a negative impression to banks when you apply for financing.
Your compensation should therefore be considered from both the company’s financial perspective and your personal needs.
Director’s Compensation Should Generally Be Set Within Three Months
Under Japanese corporate tax rules, director’s compensation generally needs to be set or revised within three months from the beginning of the fiscal year in order to qualify as a deductible expense under the regular fixed compensation rules.
For a newly established company, this means that it is important to consider the amount of director’s compensation soon after starting the business.
If the compensation is set or changed outside the permitted period, all or part of the compensation may not be deductible for corporate tax purposes.
I explain the rules regarding monthly director’s compensation in more detail in the following article.
Under Japanese Tax Law, Director’s Compensations Must Be the Same Each Month
Consider Both Tax and Business Needs
There is no single correct amount of director’s compensation for every company.
When deciding the amount, you should consider the company’s expected profit and cash flow, your personal living expenses, corporate tax, social insurance, and future plans for the business.
This is why setting director’s compensation is one of the important decisions to make when starting a company in Japan.
Need Help Starting a Company in Japan?
Our accounting firm in Japan assists foreign entrepreneurs and business owners with accounting and tax matters.
We can also connect you with specialists in areas such as visas, company registration, social insurance, and legal matters. Our network also includes specialists in web marketing, website development, and business consulting for the Japanese market.
Support is available in English.
If you need help with director’s compensation, accounting, tax, or other procedures when starting a company in Japan, please feel free to contact us through our inquiry form.