Is Your Company Treating Costs For Drinking Alone as Entertainment Expenses?


 Has your company been treating receipts for drinking alone as entertainment expenses?  Please be careful, as you could be subject to unexpected additional taxes.

What are Entertainment Expenses?

Entertainment expenses, etc. are defined in the Act on Special Measures Concerning Taxation as social expenses, reception expenses, confidential expenses, and other expenses incurred by a corporation for the purpose of entertaining, offering hospitality, comforting, giving gifts, or other similar activities to its customers, suppliers, or other persons related to its business.

It is stipulated that entertainment expenses are those that are spent for entertaining, etc., of customers, suppliers, or other parties related to the business.

Expenses for drinking alone do not fall under this category. Such costs are only personal expenses for eating and drinking, and are not allowed as corporate expenses.  Therefore, it is necessary to pay such expenses oneself.

A Case in which Heavy Additional Tax Was Imposed

In the case announced this time, a representative of a company reported the cost of using several restaurants (so-called clubs) for entertainment as entertainment expenses, but in a subsequent tax audit, it was pointed out that the costs were for the representative's personal use.

Based on the audit, the company filed an amended return stating that the individual’s payments at the restaurants for personal purposes were not entertainment expenses, but actually loans to the individual.

Under normal circumstances, the company would have paid additional corporate tax and consumption tax, additional tax for under-reporting, and delinquency tax in response to the amended tax return.  However, in this case, a heavy additional tax was imposed instead of the usual additional tax for under-reporting.

Such additional tax is imposed only when a case is judged to be malicious - for instance, when a company has concealed/disguised its finances - and even we tax accountants rarely see cases where such heavy additional tax is imposed.

Why Did That Company Become a Target for Extra Additional Tax

There are not many cases like this where such a large additional tax is imposed. So why was it imposed in this case?

It seems that the extra additional tax was imposed because the representative's personal food and beverage expenses were recorded in the general ledger, even though there was no proof that the representative had entertained clients.  This was ruled to constitute disguisement/concealment. Apparently, the company representative claimed that interacting with various people in the clubs meant that he was expanding his personal business network, but the Tokyo High Court ruled that the mere abstract necessity of expanding the network of people was not enough to be recognized as entertainment expenses for people concerned with business.

Personally, I think it is a bit severe to impose heavy additional tax for disguised concealment just because of the above reason.  I’m just guessing, but the amounts of money spent on food and drinks at the clubs might have been quite large, or the representative's attitude during the tax audit may have been unhelpful.  I have to admit that this is a rather special case.

However, it is important to note that this could become a precedent for imposing heavy additional taxes if a company treats the expenses of an employee drinking alone as entertainment expenses.  Whether or not additional tax is imposed, please keep in mind that the cost of drinking alone is not an expense of the company.

If you have any questions about entertainment expenses, feel free to contact our office.

FAQs Regarding COVID-19 & Working from Home Updated

The National Tax Agency has updated the ‘New Corona Virus’ FAQ and the Telecommuting FAQ, respectively, adding a total of five questions. The following is an explanation of points that may raise questions about these matters.


As COVID-19 brings about new lifestyles and ways of working, the National Tax Agency has clarified tax treatment for those with unclear tax relationships by publishing FAQs.  Please make sure you understand them correctly so that you will not be pointed out for omissions of income tax withholding in a tax audit after the virus has passed.

With regard to the purchase of consumables such as masks and disinfectants used during work, a certain amount of money paid to employees by way of reimbursement of actual expenses paid is not taxed as salary to the employees. Similarly, if a company directly distributes masks, etc., employees will not be taxed for them.

However, please note that the purchase of consumable items such as masks that are used outside of work, or those that are provided to non-employees such as family members of the employee, are subject to income tax as wages for the employee.

Masks, in particular, are used outside of work hours, so it is difficult to determine whether they are for work or not.

If masks are provided to employees, it’s important to prepare documents that clarify that the company has determined that the masks are necessary for work as a preventive measure against infection, and has decided to provide them based on that determination.

Expenses for Equipment Purchased for ‘Telework’

A certain amount of money paid to an employee for expenses normally required for business, such as the cost of maintaining the environment for the employee to ‘telework’ (telecommute), by a method in which the employee submits receipts, etc. for actual expenses, and the expenses are reimbursed, is not taxable as salary to the employee.  Also, renting equipment for telework to employees for the purpose of using it for work is not considered as salary.

However, telecommuting and remote work allowances paid on a crossover basis are subject to payroll taxation.  This is because it is not clear whether or not these allowances are actually used for business purposes. Please note that such allowances are subject to income taxation as an employee's salary.

The Basic Approach is Unchanged from Before COVID-19

As mentioned above, even if your company provides some equipment or monetary payments to employees, they will not be subject to payroll taxation if the benefits to the employees are necessary for the performance of their work duties.

On the other hand, if allowances are on a crossover basis, or if you are not sure whether the money is used for business purposes or not, in principle it will be subject to payroll taxation.  If this basic idea is understood, you likely will not make any major mistakes in your conclusions, even if new problems or issues arise from the spread of the new corona virus.

When a company pays for infection control or telecommuting costs, the taxation depends on whether it is necessary for business or not.  In addition to clarifying that "necessary for business" means "the extent to which the company bears the cost of infection control and telework", it is effective to prepare materials informing employees of these facts in order to avoid tax audits.

An Attempt to Save Tax by Purchasing Real Estate Just Before an Inheritance Commenced Rejected by Tokyo High Court

In the case of an heir who borrowed money from a bank just before their inheritance to buy real estate and save taxes, the government won the case in the Tokyo High Court, following the first trial, and the heir’s case was rejected.


This regards a tax-saving method/scheme that was rampant during the ‘bubble era’ of the 1980s, when people borrowed money from banks to buy real estate in order to reduce inheritance taxes.  We will show how an unreasonable case was rejected, where the Tokyo High Court ruled in favor of the government, rejecting a lawsuit by the heir following the first trial.

Real Estate Was Purchased Immediately After a Cancer Diagnosis

First of all, a brief background explanation about the case:

In September 2013, the heir acquired by inheritance a luxury rental condominium purchased by the decedent, their father, for 1.5 billion yen.  The decedent and his family had been discussing the effect of reducing inheritance tax by purchasing real estate through the bank since before his death, and the decedent had purchased the above luxury rental condominium after borrowing 1.5 billion yen from the bank immediately after his lung cancer was discovered in June 2013.

The heir valued this rental condominium at approximately 500 million yen based on the assessed value of the land, etc., and filed an inheritance tax return after recording the 1.5 billion yen borrowed as debt.  If the status before the purchase of the real estate was zero, the company borrowed 1.5 billion yen from the bank and purchased 500 million yen worth of real estate for inheritance tax purposes, creating a loss of 1 billion yen (= 500 million yen in real estate - 1.5 billion yen in liabilities).

On the other hand, the government claimed that the real estate was valued at 1.04 billion yen (appraised value) and increased the inheritance tax, which led to a dispute.  At issue was the market value of the property at the time of inheritance.

Heir (Assessment by circular-evaluated value) ¥477,611,109
National government (Assessment by appraisal value) ¥1,040,000,000

The appraised value of the property claimed by each side

The Tokyo High Court Upheld the Judgment of the Tokyo District Court from the First Trial

The Tokyo District Court, the first trial court, ruled that the government's correction (the inheritance tax increase) was appropriate, as follows:

  1. There was a significant difference between the circular-evaluated value and the appraised value; and
  2. The property was purchased with the expectation of reducing the inheritance tax burden.

The Tokyo High Court upheld the judgment of the Tokyo District Court in the first trial and found that the market value of the property in question was 1.04 billion yen.  The heirs who lost the case plan to appeal to the Supreme Court.

The Tokyo High Court ruled that, "The difference between the circular-evaluated/notified value and the appraised value is significant because the notified value is less than half the appraised value, and more than 500 million yen less.”  While acknowledging the existence of cases in which there is a difference between the circular-evaluated value and the appraised value, it can be seen that one of the reasons for the decision was that the difference was indeed too large.

Even if not a purchase of real estate immediately after the discovery of lung cancer, as in this case, careful judgment is required when there is a large difference between the notified value and the appraisal value.

It is not an easy thing to do, but taking inheritance measures using rash judgment can lead to trouble for heirs.

Please feel free to contact our office if you would like to discuss inheritance measures based on these considerations.

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