We all know that director salary cannot be changed during a fiscal year under Japanese Corporate Tax Law except for a few exceptional situations. One typical reason is when our business becomes sour, losing money and falls in red. The rule may sound strange to foreigners or people new to Japanese business environment but that’s what it is.
Director salary can be changed in the following three situations. If you change their salary for any reason that does not match with either one of them, your company tax can become incredibly high because the difference between the lowest month and the other months are to be treated as director bonus that is non-deductible expense:
1) New salary should start within first three months of its fiscal year,
2) A director takes new position (promotion or demotion) or different role/responsibility, or
3) Company’s business environment is “deteriorated”.
The condition #1 and #2 seem clear. But the condition #3 is tricky.
We all easily take it for granted that it should be ok to cut our salary if business is not performing well. But you need to be careful. The National Tax Agency’s attitude is much tougher than you would think. They allow changes only in the following situations, which is publicly presented in their website.
It says a simple poor performance or cash flow problem do not count as “deteriorated environment” bad enough to allow salary cut. It says either of the following situations are needed.
3-a) The director takes responsibility of poor performance of the company based on agreement with third party shareholder(s).
3-b) The director salary cut was demanded by banks when negotiating to rescheduling its loan repayment.
3-c) The company needs to agree with its creditors to postpone payments of debts by reducing director salaries.
I think that acceptable reasons are not limited to those but we can tell that how tough the National Tax Agency’s attitude toward director salary changes is by this public notice.