Are Executive Salary Revisions Due to the Effects of COVID-19 Recognized by Tax Authorities?


There are more and more cases of companies having to reduce executive payroll because of reduced sales due to COVID-19.  When executive compensation determined in the regularly-scheduled shareholders meeting is revised during the same fiscal year, it will be considered as corresponding to the set salary levels, and thus be included in tax-deductible payroll expenses, only if certain requirements are met. Here we will consider if executive salaries temporarily reduced because of COVID-19 effects meet the requirements to still be considered as set salaries.

Do the Salary Adjustments Correspond to Temporary Revisions?

One acceptable reason for an executive’s salary revised during the same fiscal year being treated as equivalent to the salary determined at a regularly-scheduled shareholders meeting is when the underlying reason for the revision is a worsening in business results. Reduced executive pay due to a significant deterioration in business conditions, or a similar reason, is treated as being maintained at the level of the fixed regular salary if the salary amounts before and after the adjustment period are the same.

Will cases where companies had to cut executive payroll due to reduced sales because of the COVID-19 virus correspond to such adjustments due to a worsening of business results? Regarding this question, on April 13 the National Tax Agency updated its directions via “FAQs Concerning Present Tax Treatment of Responses to Prevent the Spread of COVID-19 Infections, as well as National Tax Returns & Tax Payments, etc.” (cf., in Japanese)

Cases Having Applicable Reasons for Downturn Revisions are Indicated

The above directions illustrate two cases with sufficient grounds to have salary cuts qualify as adjustments due to a worsening of business results.  For example, with a view towards stopping the spread of the COVID-19 virus, if an event or project had to be cancelled, resulting in the coordinator/operator not receiving income they had been expecting, and thus experiencing difficulty in paying rent, employees’ salaries, etc. due to the COVID-19 epidemic, they may have had no choice but to reduce executive payroll. This would correspond to “grounds for adjustments due to worsening business performance”.  This would apply not only in situations where it became difficult for business operators to pay their rent and employees’ salaries, but also in cases where raising capital became a problem because business performance deteriorated rapidly due to the epidemic.

Even though numerical sales volumes may not have fallen significantly at present, cases in which there is no way to forecast how future business will be impacted by COVID-19, and deterioration in the company’s financial status is seemingly unavoidable, will also correspond to “grounds for adjustments due to worsening business performance”. Basically, this issue is seemingly being dealt with in a flexible manner.

Upward Reversions to Original Levels Do Not Correspond to Fixed Regular Salaries

Considering executives’ daily lives, obviously they would hope that their salaries would be returned to original levels soon after the corona virus has passed.  One example would be a case where an executive’s monthly salary reverts back to its original 500,000 yen level as the effects of COVID-19 wane and business starts to recover, after the person’s salary was cut to 300,000 yen per month due to a dramatic fall in sales.

However, it should be noted that a reversion to the original level during the same fiscal year after a downward revision (said revision having “grounds for adjustments due to worsening business performance”) will not correspond to the original fixed regular salary. After a reversion increase, the portion of the later salary level which surpasses the pre-revision level is not a deductible expense.

Regarding Support Measures for Dealing With COVID-19


Here we will introduce subsidies and grants which have been newly established for COVID-19 measures, other than teleworking category subsidies which we introduced previously (see May 2020 issue).

Subsidies for Enterprise Responses to Primary School Closings, etc.

Up to a fixed level, this subsidy covers 100% of the wages enterprises pay if granting guardians or others paid vacation leave so that they can take care of their children due to temporary closings of primary schools, etc.  The applicable period is presently the interval from February 27 - June 30, 2020.

The calculation formula for employee salaries is as follows, with the maximum amount allowed per day being 8,330 yen:

“Allowance = Daily Converted Amounts of Ordinary Wages × Paid Vacation Days”

There is no limit on such paid days off which the enterprise can grant the guardian(s), including half-days off or hours leave, provided all the following requirements are met:

  • The days off are not annual paid vacation days (Article 39, Labor Standards Ac
  • The wages paid on the days off are equivalent to those paid on annual paid vacation days

However, it should be noted that the subsidy does not apply in cases where guardians kept their children out of school based on their personal preferences.

Complete Range of Subsidies for Improvement of ‘Teleworking’ Environments, etc.

An enterprise working on special solutions, such as responses to damage inflicted on its supply chain, shifting to a business model without face-to-face interaction with clients, or development of a ‘teleworking’ (i.e., telecommuting) environment, in order to overcome hardships arising from COVID-19, can select from different subsidy category choices.  There are three choices: ① the COVID-19 special category of IT subsidies; ② the COVID-19 special category of manufacturing subsidies; or ③ the COVID-19 category for sustainability-enhancing subsidies.  The main requirements of each are similar, but details such as the subsidy rate and the maximum amount subsidized vary.

1)IT SubsidiesCOVID-19 Special Category

C-type IT subsidies are a COVID-19 special category with subsidies amounting to between 300,000 - 4,500,000 yen, with a subsidy rate of two-thirds (2/3) (an increase from the 1/2 level of the regular category).

One characteristic of this subsidy is that it also helps cover costs for rental/installation of hardware such as PCs or tablet devices for a year.

2)Manufacturing SubsidiesCOVID-19 Special Category

These are manufacturing-related subsidies payable towards corporate responses to damage inflicted on supply chains, shifting to business models without face-to-face interaction with customers, and/or development of telecommuting environments.

The maximum subsidy amount is 10 million yen - the largest possible amount of the three subsidy types. The rate for these subsidies is one-half (1/2) of relevant expenditures incurred for small and middle-sized enterprises, and two-thirds (2/3) of such expenditures incurred by small enterprises and small business operators.

3)Sustainability-Enhancing SubsidiesCorona Category

This subsidy type is different from the currently oft-discussed 持続化給付金subsidy for sustaining businesses, even though their names are similar. The maximum amount for this subsidy is 1 million yen, with a subsidy rate of two-thirds (2/3) of expenditures.

 There is no need to feel rushed to meet a particular upcoming deadline, as each of the above-mentioned subsidies have several deadlines for applications throughout the year.

※This article is based on information available as of May 10.

Treatment of Transportation Expenses Paid to Freelancers and Professionals


In principle, travel/transportation expenses paid to professionals such as lawyers, tax accountants and seminar lecturers are included in their total compensation, and withholding is required on same. Please be aware that forgetting to withhold tax on the travel/transportation expense portion is very common.

Cases Not Requiring Tax Withholding are Limited.

You surely are aware that when making payments to professionals and certain freelancers, it is required to withhold income tax and special income tax for reconstruction.  However, payments that are subject to tax include not only fees for work such as manuscript writing, lecturing and consulting, but also for travel/transportation expenses.

On the other hand, when companies “directly pay the travel/transportation expenses to transportation facilities and hotels, etc. (when the amount is within a normally necessary range of such costs)”, the payments are not included as compensation, so withholding is not required (Basic Directive on Income Tax 204-4). So only in such cases, when the company pays the costs directly, is withholding unnecessary.

The same may be said in cases where a company pays the travel/transportation expenses for freelancers, the number of whom has tended to increase recently.  In spite of it usually being necessary to withhold taxes on such payments, there seem to be many cases of withholding not being carried out.

As mentioned above, withholding is unnecessary only in cases where companies directly pay the expenses to transport facilities and hotels, etc.  When a company does not pay directly - for instance, cases in which it pays based on an estimate, or when it  reimburses freelancers after they show what they paid for travel/transportation, withholding is necessary for the entire amount paid, including those travel costs.  To reiterate, there seem to be many cases where such withholding gets overlooked.  In actuality, there are some tax investigations in which this does not create a problem, depending on the amounts involved.

However, care should be taken that taxes on all travel/transportation expenses paid be withheld, except those paid directly - with the latter types of situations merely being treated as special cases.

In Principle, Consumption Tax is Also Subject to Withholding.

In principle, the whole payment - that is, the amount including consumption tax - is subject to withholding.  However, it is permitted that only the payment amount pre-consumption tax be subject to withholding tax if the amounts of the payment and consumption tax are written in two parts on an invoice.

In this way, it may be possible that consumption tax is not subject to withholding tax, if it is written in separately on the invoice.  On the other hand, regarding travel/transportation expenses, even if they are written separately on the bill, they are subject to withholding.  As noted above, the only case where such travel expenses do not require withholding is when a company pays the costs directly to transport facilities, hotels, etc.

  • Consumption tax
    Might not to be subject to withholding, if written in separately on an invoice
  • Travel/transportation expenses
    Even if listed separately on an invoice, are subject to withholding
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