Which is Better: Executive Compensation or Dividends?

【Koshida Accounting Firm Column Date:

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


a man and fruits

Hello, my name is Taisei Koshida, and I am a certified public accountant and tax accountant.

I aim to assist non-Japanese business owners who need help with reading or writing in Japanese. If you find the Japanese tax return system challenging, I can help you with your tax filings.



In Japan, it’s uncommon for unlisted small businesses to pay dividends. However, there are cases where dividends may be suitable. We’ll explore each point in detail.





1.Are They Deductible as Company Expenses? 法人の経費になるか?

The source of dividends is the net profit after corporate tax, so they are not deductible. In contrast, executive compensation is deductible. The corporate tax rate is 22% for profits up to 4 million yen, 24% for profits up to 8 million yen, and 34% for profits exceeding 8 million yen.



2.Individual Income Tax 個人の所得税

If you opt for separated taxation, individual income tax is essentially a 20% withholding tax. Additionally, municipal tax is levied based on income. However, for taxable incomes below 7 to 9 million yen, it’s often more advantageous to choose general taxation, which includes other income types such as salaries. This is taxed at rates ranging from 5% to 45%, in addition to a flat 10% municipal tax.

Executive compensation is only subject to general taxation.




3. Are Dividends and Executive Compensation Subject to Social Insurance? 社会保険の対象になるか

Dividends are not subject to social insurance. Conversely, executive compensation typically is. Both individuals and companies contribute approximately 15% of the gross executive compensation amount. However, if the degree of management involvement is low, the time devoted is minimal, and the executive compensation is modest, such as a few hundred thousand yen, then enrollment in social insurance may not be required.



4.Individual Tax Exemption and Income Deduction for Executives and Dividends 個人の税額もしくは所得控除

When paying executive compensation, it qualifies for a salary income deduction, which increases with the amount of compensation, up to a maximum of approximately 2 million yen.



For more details on salary income deductions, please refer to this blog post.


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


Conversely, dividends are eligible for tax exemptions. When the total taxable income is below 10 million yen, 10% of the dividend income is exempt from tax. For amounts exceeding 10 million yen, the exemption rate is 5%. The applicable municipal tax rate for dividend exemptions is uniformly 2.8%.




5.Is Dual Employment Legal While Receiving Executive Compensation? 勤め先の兼業義務に反しないか

If a person receiving executive compensation works for another company, it’s crucial to ensure that their primary employer permits dual employment. This is important because the fact that they are working for another company might become known through the document of municipal tax.



When working for two companies, typically, the primary employer withholds the total municipal tax, including income from the other company. This can lead to the secondary employment being known to the primary employer. If such a situation could cause issues, opting for dividends might be a more suitable alternative.




6.Filing Individual Tax Returns for Dividend Exemption 個人の確定申告

To apply for dividend exemption, individual tax returns are necessary. In contrast, executive compensation is typically settled through the year-end tax adjustment by the company.



7.Withholding Income Tax on Dividends and Executive Compensation in Corporations 法人での源泉所得税の控除

For both dividends and executive compensation, companies withhold income tax. There’s a uniform 20% rate for dividends, while the withheld tax amount varies depending on the executive compensation.



8.The Necessity of Issuing Dividends Based on the Number of Shares Held 持ち株数に応じて配当する必要性

If your company pays dividends, they must be distributed equitably based on the number of shares held. Therefore, if you prefer not to issue dividends to a particular shareholder, you cannot choose to pay dividends, except by issuing a special class of shares.



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