1. Monthly salary
The conventional salary system in Japan includes such components as basic salary and other allowances such as transportation, position, professional, housing, family and meal allowances. On the other hand, foreign companies usually have a pre-determined annual salary from which the monthly salary is calculated simply by dividing the annual salary by 12.
2. Bonus
It is popular in Japan to pay a semi-annual bonus, in June and December, in a fixed amount, such as 1 - 3 times monthly basic salary. Japanese employees may ask to receive their fixed bonus when they are offered the annual salary system. In this case, many foreign companies determine the monthly salary by dividing the annual salary by 14 or 16 to reserve 2 - 4 months’ salary for semi-annual bonuses.
Some companies, particularly foreign-based companies, pay incentive or discretionary bonuses depending on an individual’s performance, in addition to fixed seasonal bonuses.
For tax purposes, income tax for salaried workers is levied on the annual total of monthly salary and bonus payment, etc.
3. Retirement allowance
When an employee resigns from a company, a retirement allowance is paid. The amount to be paid is usually determined by the length of employment and monthly salary of the employee.
4. Employment costs
The employer's portion of the contribution to social insurance must be considered as personnel expenses. Approximately 15.3% of remuneration is employer’s portion under the current rule.
5. Year-end adjustment of income tax
Individual income tax for salaried workers is withheld from their monthly salaries according to tax rate tables. Also, individual income tax for bonus is calculated based on the previous month salary, then withheld from their bonus payment. An employer is obliged to pay the withholding income tax to the local national tax office by the 10th of the following month.
The balance between the tax withheld throughout the year and the final amount due is adjusted with the December salary every year. This procedure, called year-end adjustment of income tax, is obligatory for employers as withholding agents.
In order for this procedure to be put into practice, an employee must submit a Declaration Form for Dependents’ Deduction ‘Fuyo Kojo tou Shinkokusho’ by the first salary payment each year.
If an employee’s total taxable income exceeds ¥20,000,000 in one calendar year, tax cannot be adjusted by this procedure. The employee must file an individual tax return by March 15 of the following year and adjust the final amount due.
6. Individual inhabitant tax
Individual inhabitant tax is a form of local tax, consisting of a prefectural inhabitant tax and a municipal inhabitant tax. These are imposed on a resident who has a domicile in Japan as of January 1 of each year. Unlike the national income tax, the individual inhabitant tax is levied on the income earned in the previous year.
There is a large time lag between salary receipt and inhabitant tax payment. Even if an employee becomes unemployed and has no income for the whole of the current year, he/she must pay the inhabitant tax etc.
7. Economic benefit
(1) Legal rent system
Many companies provide housing to their employees and directors as a fringe benefit. Principally, this benefit is treated as a taxable income to the individuals. However, if an employee or a director pays an appropriate portion of the fair market rent (so-called ‘legal rent’) to the employer, the rest of economic benefit (i.e., the fair market rent minus the legal rent) is treated as non-taxable income. In order to adopt this beneficial tax treatment, the lease agreement must be directly between the landlord and the employer.
The amount of legal rent varies according to whether you are an employee or a director of the company.
(2) Utilities (Water and electricity)
If a company pays the utilities for the benefit of its employees or directors, income tax is imposed on it as an economic benefit. Therefore the company needs to withhold taxes. However, if such withholding is not made upon mutual agreement between the company and employees/directors, such tax withholdings become subject to gross-up calculation as an economic benefit.
(3) A part for social-insurance-premiums of individual burden
If a company pays an employee’s portion of social insurance premiums for the benefit of employees/directors, income tax is imposed on it as an economic benefit. Same as explained above, if appropriate withholding is not made on such benefit, it becomes subject to gross-up calculation.
(4) Income Taxes
When a company pays the income taxes for the benefit of employees/directors in order to fix the net take-home pay, taxes are imposed on those income taxes as an economic benefit. Same as explained above, it become subject to gross-up calculation.
(5) Home leave
If a company pays traveling expenses of an employees’ or an officer’s private trip, income tax is imposed on it. However if a company pays home leave expense for the foreign employee (expatriate), it is not subject to tax under certain conditions, i.e., periodical home leave once a year, and most rational trips through reasonable routs and economical fairs.
(6) Japanese language training
If a company pays Japanese language training expense for the benefit of its foreign employee and its dependent spouse in Japan, it is not subject to tax as long as such training is deemed necessary due to business needs in Japan.
(7) School tuition
If a company pays the tuition of the child’s school in Japan, an income tax is imposed on it as an economic benefit. However, when a company makes a donation to the school according to the scholarship plan to get exemption of tuition, such benefit is not subject to tax. The donation can be deducted from corporate tax.
8. Vacation
(1) Annual paid vacation
The Labor Standards Law regulates that an employee who has worked for the first continuous six months of a year qualifies for 10 days paid vacation if his/her attendance rate is 80% or more during that period.
In addition to the annual paid vacation, increasing numbers of companies offer paid summer vacation. The number of days varies according to the size of the company or industry. Despite an increase in the trend for offering summer vacation, offering vacation as long as one month is not common yet among Japanese companies.
(2) Special paid leave
As part of an employee's welfare benefits, most Japanese companies make rules for paid leave and/or a cash gift for special occasions in an employee's private life (congratulatory or condolence leave/payment)
9. Company’s work rules
In accordance with the Labor Standards Law, a company which continuously employees 10 or more employees is required to prepare and submit work rules to the local Labor Standards Inspection Office. A document stating an opinion of an employee representing a majority of all employees must accompany the work rules.
The same procedure is required where there is a change in the rules. Submission of the work rules is not mandatory for companies employing fewer than 10 employees. However, it is recommended that such companies make basic rules, in order to establish mutual understanding of working conditions and avoiding any disputes..
Standard work rules include:
- General rules
- Service disciplines
- Employment, appointment and probation
- Working hours, intervals and holidays
- Overtime and holiday work
- Salary, bonus and allowances
- Vacation, special leave and other absence
- Retirement, resignation and discharge (including reasons for discharge)
- Safety and sanitation
- Commendation and punishment
- Supplementary provisions
10. Director’s Remuneration, Bonus and Retirement Allowance
Under current Japanese law, any portion of a director’s remuneration and retirement allowances which exceeds a reasonable level is disallowed as expenses. Therefore, when a company appoints directors, the total salary package for the directors should be planned carefully beforehand. In order to save corporate tax, remuneration for directors should be paid in equal amounts on a regular basis. Director bonus can be deductible if remuneration amount and timing of payment are fixed and reported to the tax authorities in advance.
Retirement income is computed as 50% x (payment received - retirement income deduction). However, effective from the beginning of 2013, the 50% deduction is eliminated, when computing the retirement income of directors whose period of employment is less than five years.Please refer to a tax specialist for details.