Confirmation of Who is Eligible for the New Flat-rate Tax Credit in the Event of a Job Change

Introduction

For the flat-rate tax reduction that is about to start, "employees who are employed on the reference date" as of June 1 will be eligible for the monthly tax reduction administration. If there are employees who have changed jobs, dealing with their situation will differ depending on whether the dates of their resignation and mid-career hiring cross June 1.

[Persons employed on the reference date]
Residents who are working for a payroll employer as of June 1, 2024, and to whom 甲欄of the Withholding Tax Withholding Schedule is applied for withholding taxes on wages, etc.

If Employed on June 1, an Employee is Eligible for Monthly Tax Reduction Administration

Payroll administrators are responsible for two types of tax reductions: monthly tax reductions, which are deducted from withholding taxes starting with the first payroll payment after June 1, 2024; and annual tax reductions, which are deducted and settled from the annual income tax amount at the time of year-end adjustment.

Employees who: 1) are working as of June 1, 2024; 2) have already submitted the Application for (Change in) Exemptions for Dependents of Employment Income Earner (those applying under甲欄; and 3) are residents of Japan are applicable. Therefore, those who are not working as of June 1, 2024, or those who have already submitted the Application for (Change in) Exemptions for Dependents of Employment Income Earner - but who apply for乙欄or丙欄- do not fall under this category.

On the other hand, employees who have submitted an Application for (Change in) Exemptions for Dependents of Employment Income Earner form at the time of the year-end adjustment for 2024 are eligible for the tax reduction for the annual tax adjustment. Those who are not subject to the year-end adjustment because their salary income exceeds 20 million yen, or for another reason, are not eligible.

For example, for a taxpayer whose salary income exceeds 20 million yen and who is enrolled under甲欄as of June 1, 2024, a flat-rate tax reduction of 30,000 yen is provided through monthly tax reductions. However, since no year-end adjustment is made, the amount of the applicable flat-rate tax reduction will be settled when the taxpayer files his/her final return.

Some People Who Not Eligible for Monthly Tax Reduction Administration at Either of Their Companies

When an employee or other worker changes jobs, we need to be concerned about the handling of monthly tax reduction administering for both the company that the person has left as a result of the job change and the company that he/she just joined mid-career as a result of the change.

As previously stated, the monthly tax reduction administration only applies to employees, etc., who fall under the category of "employees who are employed on the reference date," so the date of retirement or mid-career new employment of a person changing jobs must be accurately determined to verify whether or not (s)he qualifies under the category of an employee employed on the reference date.

Example: Employee X resigned from Company A on May 25, 2024 and joined Company B on June 10, 2024.
Employee X is not an “employee as of the reference date" at Company A because (s)he left Company A on or before May 31. Therefore, Company A does not do the monthly tax reduction paperwork administration for X.

On the other hand, X is not an “employee on the reference date” at Company B, either, since (s)he started work there on or after June 2. Therefore, even if Company B's payroll is paid on June 25, no monthly tax reduction administration will be performed with respect to X.

In other words, X is not eligible for monthly tax reduction paperwork administration at either Company A or Company B. These kinds of cases do exist.

However, since Company B will be subject to the annual tax reduction at the time of year-end adjustment, the flat-rate tax reduction will be implemented at that time. X is not completely excluded from the flat-rate tax credit.

Q&A Released Regarding Flat-rate Tax Reductions for Sole Proprietors

Introduction

The flat-rate tax reduction applies not only for salaried workers, but also for sole proprietors. This section explains the flat-rate tax reduction for sole proprietors, which is not discussed much in the "Q&A on the Flat-rate Income Tax Reduction for 2024" published by the National Tax Agency.

Let's take a look at the situation for sole proprietors, including how they can receive a flat-rate tax reduction.

Deductions from Estimated Tax Prepayments

For the 2024 income tax year, a flat-rate tax reduction of 30,000 yen per taxpayer, his/her spouse and one dependent will be deducted. The method of implementing the flat-rate tax reduction for business income earners, real estate income earners, etc. depends on whether or not they are eligible for estimated tax prepayments.

First of all, an estimated tax prepayment is a tax payment of one-third of the tax prepayment calculation base amount* twice a year, in the first and second terms, by a taxpayer whose tax prepayment calculation base amount is 150,000 yen or more.
(*: https://www.japaneselawtranslation.go.jp/ja/laws/view/3120#je_pt2ch5sc1sb1at2)

The tax prepayment calculation base amount for 2024 is calculated as if there were no flat-rate tax reduction amount, and in principle is the same as the amount of taxes in 2023.

If the tax prepayment calculation base amount is 150,000 yen or more, the tax reduction amount (30,000 yen) for the taxpayer will be deducted from the amount of  the estimated tax prepayment in the first term. The amount of the scheduled tax payment for the first term, which will be notified by the competent tax office head in June or later, will already have had the amount of the tax reduction for the individual deducted.

The flat-rate tax credit for a dependent spouse or other dependents will not be deducted from the estimated tax prepayments. Those credits are to be taken on the tax return.

For sole proprietors whose tax prepayment calculation base amounts are less than 150,000 yen, and who are therefore not required to make estimated tax prepayments, the flat-rate tax reduction amount will be deducted through their tax returns.

Deductions are Possible for Dependent Spouses if Reductions Can be Applied for

Tax reductions for a dependent spouse and other dependents of a person subject to estimated tax prepayments can be deducted from the amount of estimated tax prepayments by applying for a reduction in the amount of the estimated tax prepayments. However, not all taxpayers can apply for such reductions.

Those who can apply for reductions in estimated tax prepayments are those whose estimated tax payment amounts as of June 30 are less than the estimated tax prepayments threshold. If your total projected annual income as of June 30 is 18.05million yen or less, you can receive a deduction from your estimated tax prepayments not only for yourself, but also for your dependent spouse and other dependents.

Deadlines for Payment of Estimated Tax Prepayments  also Postponed

With the implementation of the flat-rate tax reduction, the deadline for payment of estimated tax prepayments for the first term will be extended from July 31 (under normal circumstances) to September 30 (under special circumstances), and the deadline for application for approval of tax reduction will be postponed from July 15 under normal circumstances to July 31, due to the special circumstances.

The due dates for estimated tax prepayments

Deadlines	First term	From July 1, 2024 until September 30 of the same year
	Second term	From November 1, 2024 until December 2 of the same year

Reference: Q&A on flat-rate tax reduction for income tax for the year 2024 (Summary, related to withholding income tax [revised version as of May 2024])
https://www.nta.go.jp/publication/pamph/gensen/0024001-021.pdf

If a Decedent Lent Money to a Family Company

Introduction

Family-owned companies often receive loans from their directors and officers. The loans may be listed on the balance sheet as loans to directors, or may be included in short-term or long-term loans. The case of a company president or his/her relatives lending money to the family company is easier than the procedure for a capital increase, but several disadvantages exist.

Loans Subject to Inheritance Tax

It is common in family-owned companies for the president or a family member to lend money to the company. This often occurs because of the company's cash flow difficulties.

If performance does not improve in the first place, this loan balance may increase, but it will not decrease. If such a loan balance remains at the time of inheritance, the loan becomes an inherited asset and is subject to inheritance tax.

One example may be where a president has lent his company 100 million yen, but the cash flow has not improved, and the 100 million yen remains unpaid.

For this reason, some might believe that the actual value of the loan is less than ¥100 million. However, in many cases, the inheritance tax assessed value is considered to be "the balance of the loan itself (100 million yen at face value)”.

What Was the Related Ruling in the Tokyo District Court?

In a March 26, 2024 ruling by the Tokyo District Court, a decedent had lent approximately 500 million yen to a family-owned company.

The National Taxation Office insisted on a valuation of 500 million yen, while the taxpayer insisted on a valuation of approximately 260 million yen.

In addition, the family-owned company had 100 million yen in excess liabilities as of the date of inheritance, its sales and profits were declining, and its business situation was deteriorating.

However, even under these circumstances, the Tokyo District Court refused to recognize the taxpayer's claim, and instead recognized the government’s argument, resulting in the taxpayer's defeat.

The Tokyo District Court reasoned that, "The company had been able to pay its directors' remuneration" and, “It had taken out new loans from financial institutions and was able to repay them”.

Thus, the majority of disputes over the assessed value of loans to family-owned businesses end up with taxpayers’ claims being disallowed.

[Summary of Disadvantages]
-Subject to Inheritance Taxes
Loans become inherited property and are valued at face value, which may result in a higher inheritance tax burden.

-Disputes over assessed values
Even if the actual value of the loan is low, it is often valued at the face value of the loan, making it difficult for the taxpayer's claim to be recognized.

It is common for small and medium-sized businesses to be lent money by family members.

If the inheritance were to occur while in this situation, the inheritance tax would be levied on the face value amount, even if no repayments have been made by the company.

If large loans have been made to family-owned companies, it is important to take action early to consider recapitalization measures or other financial strategies.