Is Remuneration of Directors via “Partially Unpaid Salaries → Lump Sum Payments” Permitted?


There have been cases where directors’ remuneration has not been paid, due to company results having worsened as a result of COVID-19.  How should we deal with this matter so as to not cause tax problems?

Do the Payment Adjustments Correspond to Temporary Revisions as a Result of Worsening Business Conditions, or Not?

When a company has difficulty paying directors’ remuneration because of the effects of the new coronavirus, the following coping strategies will likely be considered:
① Reducing the directors’ remuneration outright
② Paying only part of their remuneration now

For ①, tax problems will not be caused if deteriorating business conditions are the reason for the revision.  For instance, it is logical that results for companies in sectors which were requested to refrain from operations, in order to prevent the spread of COVID-19, would be negatively impacted.

When the business downturn is the reason for the revisions, the remuneration both before and after the reductions basically constitutes expenses on corporation tax returns.

In a case where a business suffered a dramatic downturn due to the COVID-19 pandemic, directors’ remuneration will most likely be reduced as in ① above. In such a situation, likewise, amounts imposed on the remuneration for social insurance premiums and income tax withholding probably can be reduced.

However, in reality there are cases where the underlying reason for the revisions may not correspond to the worsening in business conditions. In such situations, as an alternative for consideration, ② would involve paying part of the directors’ remuneration currently, with the remainders to be paid later in lump sums.

This latter method is a way to proceed by paying only a portion, without reducing the official amounts of the directors’ remuneration, until there is an improvement in the financial situation of the business. How would such cases be dealt with under corporate tax law?

Risk of Denial if There is a Tax Investigation/Audit?

It should be noted that the recording of accrued expenses for directors’ remuneration, without there being circumstances such as a worsening financial condition which make doing so unavoidable, might later be denied – i.e., not accepted as expenses – in a tax investigation.

Here the judgement by a national tax tribunal (on 7 June 1989) will be cited as a reference example. In this case, it was judged that, “A lump sum payment for a director’s remuneration after recording partial accrued expenses for the remuneration will not be permitted as a business expense.”

In the above case, the account payable was judged as a director’s bonus, because ① there were no circumstances which prevented paying the entire remuneration amount, and ② the partial remuneration which was recorded as including accounts payable was paid at almost the same time as when bonuses for employees were paid. In other words, there were no unavoidable reasons, such as worsening financial condition(s), for having taken such an action.

Furthermore, though a partially-unpaid remuneration situation could end up continuing for a long time due to long-lasting effects of the pandemic, regardless of the length of the unpaid period, the decision as to whether or not the later payments get denied as expenses depends on whether the business was in fact facing a worsening financial condition which made taking such steps necessary.

The audit result will depend upon whether documents have been preserved that can certify a business was in fact facing a deteriorating financial condition, which resulted in the remuneration for the director(s) being partially unpaid. This would have been because of changes in the business environment, or effects therefrom, which had not been incorporated at the time of the decisions on remuneration.

However, unlike ①, please be aware that social insurance premiums and income tax withholdings on the remuneration will not likely be reduced.

Even when Teleworking, Commuter Passes are Not Taxed?


When companies introduce teleworking (employees working at home for their company) due to coronavirus infection, are commuter passes subject to taxation? Even if employees don’t commute because they are teleworking, will commuting allowances be untaxed?

No Problem In Situations where Teleworking is Temporary

Up to certain limits, commuting allowances paid to employees are not subject to tax. Even if workers don’t commute to their company due to temporary teleworking arrangements, there is no problem handling their allowances as non-taxable, based on the following reasons:

  1. The employees’ original workplace(s) are at the company.
  2. There is some possibility of employees commuting during the period the teleworking is implemented.

Decisions About Commuting Allowances Being Tax-Exempt Do Not Depend on Employees Having Actually Commuted

However, for instance, if the company paid for an employee’s commuting allowance (e.g., the cost of a three- or six-month commuting pass) at the end of March, yet due to teleworking almost no commuting took place, there are many people expressing concern that such allowances (paid under the premise that commuting to the workplace would occur) may become subject to tax if, for instance, teleworking continues for a long period. In fact, the tax exemption decision regarding commuting allowances, in the end, has nothing to do with whether the employee actually commuted or not. The main point the decision is based upon is whether or not the commute goes via the most economical and reasonable route, etc.

Even if the teleworking period is prolonged, considering the possibility of the employees’ commuting, so long as there is a certain rationality to the commuting allowances being paid, it appears that there should be no problem considering them basically tax-exempt.

This is because it is unclear when the effects of the pandemic will end.

On this account, companies have been considering the implementation period, taking care regarding the infection risks to their employees.

Under these circumstances, it is not being assumed that later tax audits will find that commuting allowances become subject to tax as part of payroll, merely because of less commuting being done, or the teleworking period having become prolonged.

Attention Required in Cases where Teleworking Becomes the General Situation

On the other hand, recently some companies have been prompted to introduce teleworking as a general practice, where employees’ workplaces are essentially their homes, thus making commuting unnecessary.

In such situations, it is likely that claims that commuting allowances are tax-exempt will be judged to be irrational.

Of course, when the basic structure of work changes to teleworking, commuting allowances themselves are likely to be generally abolished. Therefore, when the employees come to the office, their incurred expenses are assumed to be reimbursed as transportation costs. In addition, note that when refunds of commuting passes during the teleworking period are allocated to teleworking allowances, they become subject to income tax as salary, since they are no longer commuting allowances.

Capital - Money Which Does Not Have to be Returned


Many people have a mistaken understanding about “net assets” at the lower right of a balance sheet.  Having a proper understanding of “net assets” is essential.

Two ways of fundraising are represented in “net assets”.  Let’s examine both.

Capital Not Connected with a Corporation’s Value

“Net assets” is located under “liabilities”.  In the “net assets” category is “capital” - money paid (‘injected’) by stockholders as capital (stock).  It appears that many people are confused regarding “capital”. For instance, basically it is not feasible that a stockholder would come to the company’s office and say, “Please return my capital”.

Capital (stock) means that a company issues shares, which are given in exchange for the capital injections from stockholders. In other words, stockholders own the shares of stock.

Even if a stockholder sells his/her stock to another stockholder, nothing will change within the company. This is because only the stockholder changed, due to the stock dealings outside.

Even if a stock price rises two or three times, the capital level stays unchanged.  If a stock price doubles, it just means that the value of the stock has doubled.

Three Ways for a Company to Raise Money

In addition to the misunderstanding in regards to capital, there is another point of misunderstanding by many people about balance sheets.

A guidebook on accounting says, “There are two way for companies to raise money; one is to borrow from others, and the other is to get capital injections from capitalists”. However, actually there are three ways a company can raise funds. In addition to the two above, the third method is for “a company to earn money itself”.

In short, the ”net income” of a company’s earnings is accumulated as “retained earnings” at the lower right.

So let’s summarize the balance sheet again.

The three ways a company raises money include borrowing from others, getting injections (capital stock) from capitalists, and collecting money through its own business operations. A balance sheet shows what form that money is currently in, and where it exists in the company.

Incidentally, the total amount of the right side of a balance sheet is called “gross capital”; it is the total of liabilities and net assets. Also, the total amount of the left side is called “gross assets”, and is the total value of assets.

The total amount of gross capital is always equal to that of gross assets. Moreover, gross capital could be called “own capital” and gross assets called “borrowed capital”.

The total of own capital and borrowed capital is gross capital, the overall total of the right side of the balance sheet. It certainly does no harm to memorize these words, in case you have discussions on this topic.

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