Executive Compensation vs. Dividends in Japan: Which Is Better for Business Owners?

” The strongest principle of growth lies in the human choice. “―  George Eliot

Hello, my name is Taisei Koshida, a Japanese Certified Public Accountant and Licensed Tax Accountant.

I help foreign business owners in Japan navigate Japanese accounting and tax matters, especially when language barriers make the process difficult.

If you own a company in Japan, you may wonder whether it is better to receive executive compensation or dividends. This article explains the key tax differences, social insurance implications, and practical considerations to help you choose the most suitable option.

１. Are Executive Compensation and Dividends Deductible?

Dividends are paid from a company’s after-tax profits and are therefore not deductible for corporate tax purposes.

Executive compensation, on the other hand, is generally deductible if it meets the requirements under Japanese tax law, such as being fixed compensation paid in accordance with the applicable rules.

２. Individual Income Tax

Dividend income may be taxed under the separate taxation system or, in some cases, under the comprehensive taxation system, depending on which method is more advantageous.

Executive compensation is taxed as employment income under the comprehensive taxation system.

３. Social Insurance

Dividend income is generally not subject to Japanese social insurance premiums.

Executive compensation is generally subject to social insurance.

However, whether a representative director or executive must enroll in social insurance depends on various factors, including the company’s structure, the executive’s role, working hours, and the amount of compensation.

４. Employment Income Deduction and Dividend Tax Credit

Executive compensation is treated as employment income, allowing the recipient to benefit from the employment income deduction under Japanese tax law.

For more information about the employment income deduction, please see the following article.

The System of Individual Income Tax in Japan: For Salaried Individuals

Dividend income may also qualify for the dividend tax credit, provided the applicable legal requirements are satisfied.

５. Working for Another Company While Receiving Executive Compensation

If you receive executive compensation while working for another company, you should first confirm that your primary employer permits outside employment.

In some cases, your secondary employment may become known to your primary employer through the resident tax collection process.

If this could create employment-related issues, receiving dividends instead of executive compensation may be worth considering.

６. Tax Returns for Dividend Income

If you wish to claim the dividend tax credit or choose a particular taxation method for dividend income, filing an individual income tax return may be necessary.

Executive compensation is generally settled through the employer’s year-end tax adjustment.

７. Withholding Tax

Companies are generally required to withhold income tax when paying both executive compensation and dividends.

The withholding rules and applicable tax rates differ depending on the type of payment.

８. Dividend Distribution Based on Share Ownership

In principle, dividends must be distributed according to each shareholder’s ownership percentage.

If you wish to distribute dividends differently among shareholders, it may be necessary to issue different classes of shares in advance.

At Koshida Accounting Firm, we have extensive experience helping foreign business owners with Japanese accounting and tax matters.

Through our network of trusted professionals, we can also assist with visas, company registration, social insurance, legal matters, website development, digital marketing, and business consulting in Japan.

All of our services are provided in English.

If you have any questions about executive compensation, dividends, or Japanese corporate taxation, please feel free to contact us through our inquiry form.