15. Deductible Directors' Compensation in Japan 役員給与の損金算入

役員給与について英語でまとめてみました。（国税庁ホームページ）

An overview of the requirements for deducting directors' compensation in Japan is as follows (Source: National Tax Agency). For more about Japanese tax and accounting, click HERE:

In Japan, directors' compensation paid by a corporation is deductible only if the compensation falls under any of the following categories. It should be noted that if compensation falls under any of the following but the amount is excessive, the excessive amount is non-deductible: 

1. Periodic Fixed Compensation　定期同額給与
2. Pre-determined Pre-notified Compensation　事前確定届出給与
3. Performance-Based Compensation　業績連動給与

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1. Periodic Fixed Compensation

Periodic Fixed Compensation is any of the following defined in (1) to (3): 

(1) Compensation paid periodically at intervals of not more than one month where the amount of each payment ("Periodic Payment") or the amount of such a payment less withholding tax is the same. 

(2) If any of the changes below from A. to C. is made, compensation where the amount of each Periodic Payment or each Periodic Payment less withholding tax is the same throughout:

• the period from the beginning of the fiscal year to the day before the first payment after the change; and
• the period from the day following the last payment before the change to the end of the fiscal year.

A. A change within three months from the beginning of the fiscal year 

B. A change due to a "Special Reason," such as a change in the director's title, a significant change in his or her job responsibilities, or any other similar unavoidable reason during the fiscal year, excluding the change in A.  

C. A reduction due to "Business Deterioration," such as a significant deterioration of the corporation's business conditions or any other similar reason during the fiscal year, excluding the change defined in A. or B.  

(3) Continuously paid economic benefits where the amount of such benefits provided for each month is approximately the same.   

2. Pre-determined Pre-notified Compensation

Compensation is Pre-determined Pre-notified compensation if the following are satisfied:

• The compensation is paid at a pre-determined date for the service of the director.
• The compensation is paid based on a decision on the distribution of a pre-determined amount of cash, a pre-determined number of shares or stock acquisition rights, or certain restricted stock units (RSUs) or certain stock acquisition rights related to a pre-determined amount of monetary claims.
• The compensation is not Periodic Fixed Compensation defined in 1. or Performance-Based Compensation defined in 3.

If the compensation includes certain RSUs or certain stock acquisition rights distributed by the surviving or transferee company to a director of the disappearing or transferring company in an acquisition or spin-off ("Parent's RSUs" or "Parent's stock acquisition rights" respectively), and any of the following applies, the relevant condition must be satisfied:

   
(1) If the compensation is not either of the following, a notification for Pre-determined Pre-notified Compensation must be filed:  

A. Cash paid by a non-family corporation to a director who does not receive a Periodic Payment  

B. Certain stocks or stock acquisition rights for future service provision

(2) If shares are granted, the shares are issued by the corporation or its controlling corporation, and have market value or can be exchanged with shares with market value.

(3) If stock acquisition rights are granted, the stock acquisition rights are issued by the corporation or its controlling corporation, and the shares to be granted upon the exercise of the stock acquisitions rights have market value.  

Deadline for notifying Pre-Determined Pre-Notified Compensation 

(1) General
In general, a corporation has to file such a notification by the earlier of either of the following dates:

A. The date one month from the date on which the decision about the compensation is made at a shareholders' meeting

B. The date four months from the beginning of the fiscal year

(2) If a notification is filed due to a Special Reason
A notification for a Special Reason must be filed by the later of either of the following dates:

A. The earlier of either (1)A. or (1)B. above

B. The date one month from the date on which the Special Reason occurs

 
(3) If a notification is filed to change an already notified compensation
A notification to change the compensation for which a notification has already been submitted as provided for in (1) or (2) due to any of the following reasons must be filed by the applicable due date:  

A. Special Reason

The date one month from the date on which the reason occurs

B. Business Deterioration (only to reduce the amount of cash to be paid or the number of shares or stock acquisition rights to be granted)

The date one month from the date on which the change is approved at a shareholders' meeting 

(4) Exceptional treatment where an unavoidable reason exists  

If an unavoidable reason exists, the compensation may be deductible even if a notification is not filed by the deadline.

 

3. Performance-Based Compensation

Compensation is Performance-Based Compensation if the following apply:

• The amount or number of cash, shares or stock acquisition rights, certain (RSUs) or Parent's RSUs or certain stock acquisition rights or Parent's stock acquisition rights to be granted is determined based on a performance indicator (e.g., a profit indicator or a market share value indicator) of the company or its related company; and
• The number of shares or stock acquisition rights to be granted or expire without consideration changes due to a reason other than the service period.

Performance-Based Compensation is deductible if all of the following are satisfied: 

(1) The amount or number of cash, or shares or stock acquisition rights to be granted or expire without consideration is determined objectively based on an indicator that represents the profit, market share value, or sales of the fiscal year ending on or after the beginning of the service period related to the compensation and all the following are met:  

A. The amount or number of the compensation is limited to the pre-determined amount or number and is calculated in the same manner as that applied to other directors. 

 

B. The compensation or other committee determines a method for calculating the compensation, and other similar necessary procedures are completed by the date three months from the beginning of the fiscal year of the payment.

 

C. The details of the compensation are disclosed in the securities report or in certain other manners without delay on or after the date of the completion of the procedures described in B.

(2) The following conditions are satisfied: 

A. Compensation other than compensation defined in B

The compensation is (expected to be) granted by any of the following dates as appropriate: 

(a) Cash 

The date one month after the day on which the profit, market share value or sales indicator used to determine the amount of the compensation is determined 

(b) Shares or stock acquisition rights 

The date two months after the day on which the performance-based indicator used to determine the number of the shares or stock acquisition rights is determined

B. Certain stock acquisition rights or Parent's stock acquisition rights whose number to be granted or expire without consideration changes due to a reason other than the service period 

The stock acquisition rights or Parent's stock acquisition rights are granted by the date one month after the day on which the necessary procedures are completed. 

  
(3) The compensation is recognized as an expense for accounting purposes. 

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