1. Monthly Salary
Monthly salary is defined as a form of periodic fixed payment from an employer which includes basic salary and other allowances such as transportation and position allowances.
Salary is considered as remuneration, compensation, wages, annual allowances, bonus and other forms of earnings received.
Bonus is a form of a payment other than fixed salary, classified as bonus, seasonal bonus for summer and winter, and other forms of allowances or commissions.
If distinguish between salary can’t be clarified, all types of bonus and allowances which is not decided in advance by amount or announced guidelines, and temporary payment based on profit falls under the category of bonus.
3. Retirement Allowance
Retirement allowance is a form of payment from an employer due to retirement being paid by lump-sum payment or pension plan
4. Year-End Adjustment of Income Tax
Employers have the responsibility to withhold income tax from employees’ monthly salaries and bonuses in accordance with the statutory “Withholding tax Amount Table for Employment Income.” Subsequently, any difference between the amount of income tax withheld and the final income tax amount calculated based on the actual amount of salaries and bonuses paid during the year will need to be settled at year end. Employers are required to settle this difference for each employee, who has submitted the “Declaration of Income Deductions for (and changes in) Dependent Family Members,” upon last salary or bonus payment of the year. This process is called “Year-end tax adjustment.”
Employees, whose annual salaries exceeding 20 million yen, are not subject to year-end tax adjustment.
The year-end tax adjustment usually takes place in December. However, in cases where an employee becomes a non-resident during the year, the year-end tax adjustment may be processed with the employee’s final salary settlement in Japan.
5. Individual Inhabitant Tax
Individual inhabitant tax is a local tax, consisting of prefectural inhabitant tax and municipal inhabitant tax. A company is required to submit a salary payment report by January 31 to local offices where each employee has domicile. Individual inhabitant tax shall be determined at local offices based on this salary payment report. Based on notices from local offices, a company withholds individual inhabitant tax from each employee from June till May the following year.
(1) Annual Paid Vacation
Employer must provide its employee with 10 days of paid vacation when employment of 6 months is completed with the attendance rate being 80% or more during the period.
Duration of service and annual paid vacation days are listed below. Unused annual paid vacation will be expired within 2 years.
|Duration of Service||0.5 years||1.5 years||2.5 years||3.5 years||4.5 years||5.5 years||6.5 years|
(2) Special Paid Leave
Employer is not required to provide additional paid vacation for personnel accidents or sickness. But as a custom, many Japanese companies provide additional vacation for employee’s marriage, death of close relatives and childbirth as part of a benefit program.
7. Company’s Work Rule
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 employees must be submitted with the work rules.
The same procedure is required when there is a change in the rules.
In addition to work rules, labor-management agreement shall be announced to employees.
Submission of the work rules is not mandatory for companies and establishment employing fewer than 10 employees, however, it is recommended that such companies make basic rules in order to avoid any disputes.
8. Director’s Remuneration, Bonus and Retirement Allowance
(1) Determination of Directors’ Remuneration
Directors’ remuneration is to be determined in the article of incorporation or shareholders’ meeting.
(2) Definition of “Director” under the Corporate Tax Law
In addition to the director defined by the Companies Act, such as director, executive officer, and statutory auditor, a person who is substantially involved in the management of a company is deemed as director for tax purposes. As long as an individual is registered as director, this person is regarded as director for tax purposes regardless of the substance of involvement in the company.
The representative of a foreign corporation’s branch office in Japan, unless being a director of the head office, will not qualify as a director for tax purposes.
(3) Director Salaries which Qualify as Deductible Expense for Corporate Tax Purposes
Director salaries deductible for corporate tax purposes are broadly categorized into following three types
- Fixed amount periodical compensation:
Fixed amount salary paid monthly throughout the fiscal year.
- Fixed compensation notified in advance:
Salary that is paid in accordance with advance notification of amount and time of payment filed to the tax office. If the amount and time of payment for director salary is fixed in advance, such salary can qualify as deductible expense for corporate tax purposes only by submission of notification.
- Profit-based compensation:
Salary that is calculated based on the corporation’s profit (applicable to listed companies)
Retirement Allowance to Director
For the calculation of income tax imposed on retirement allowance, there is a tax benefit to squeeze the taxable income to half the amount of taxable income after retirement allowance deduction.
However, this tax treatment cannot be applied to taxable income calculation for retirement allowance paid to director who has worked for 5 years or less.
9. Difference in Salary by Types of Company
In principle, types of company of the employer will not affect the treatment of salary paid by a company in Japan. However, tax and social insurance treatment will be varied based on resident status of employees (resident or non-resident) and the location where salary is paid (paid in Japan or overseas).
10. Income Tax Applied to Foreigners Staying in Japan
Under the income tax system in Japan, individuals are classified into residents and non-residents. Residents are further classified into permanent and non-permanent residents. The scope of income subject to taxation in Japan is defined for each of these categories.
＜Resident Status and Tax Treatment＞
Classification of Resident Status
|Individual||Resident||Permanent Resident||An individual who meets either of the following conditions:
*Has a domicile in Japan
*Has been residing in Japan for a period of one year or more and is not a non-permanent resident.
|Non-Permanent Resident||An individual who meets both of the following conditions:
*Does not have Japanese nationality.
*Has been residing in Japan for a period of 5 years or less in the last 10 years.
|Non-Resident||An individual other than a resident.|
- Permanent Resident
Permanent residents are subject to Japanese taxes not only on their income earned in Japan (domestic source income) but also on income earned outside Japan (foreign source income). In other words, permanent residents are subject to Japanese taxes on their worldwide income.
- Non-Permanent Resident
Non-permanent residents are subject to taxation in Japan with respect to all domestic source income and the portion of foreign source income that is paid in or remitted to Japan.
Non-residents are individuals who reside in Japan for a period of less than one year. Non-residents are subject to Japanese taxes only on their domestic source income.
＜Tax Exemption for Short-Term Visitors＞
Non-residents are liable for Japanese taxes on their domestic source income. However, such taxes may be exempt if certain requirements are satisfied, such as non-resident working in Japan for only a short period of time who is a resident of a country that has a tax treaty with Japan(68 countries/areas at 31st July 2013). This is called tax exemption for short-term visitors.
＜Calculation of tax and taxable income＞
Once the scope of income subject to Japanese taxation is determined, income needs to be classified to certain types of income stated in the Income Tax Law. Then taxable income is calculated after applying certain deductions. Tax amount is calculated by multiplying the progressive tax rates shown in the below table to the taxable income.
|Taxable income||Applicable tax rates|
|1.95 million JPY or less||5%|
|Over 1.95 million JPY
and 3.30 million JPY or less
|Over 3.30 million JPY
and 6.95 million JPY or less
|Over 18 million JPY||40%|