What to do with extra cash in a Kabushiki Kaisha?

[LordFerret]

Have established a KK here in Japan (only one employee - me) which is in its second year now. Our accountant has set up a company pension and I get paid a basic salary. My question is what can I do with the excess money in the business? At present, it is just sitting in the bank and not working in any way. Is it possible to invest this extra cash or top up the pension in a tax-efficient way? I am finding it hard to ask these questions with my accountant and not being able to find the information I need is incredibly frustrating.

[seb]

Hello

First, the profit you have will be taxed at ~30%. The only way around that (that I know of) is putting more expenses on your company side or paying yourself a bigger salary. But since the salary marginal tax + social contribution rate quickly rises above 30%, that cash is better sitting in the company account for now.

Now, what you can do with that cash:
- you can open a company trading account on most major online securities companies (like Rakuten Securities for example) and invest that money
- you can try to negotiate with your owner to put your company name on your rental lease, and pay directly from the company. It raises the expenses on the company side, and you can lower your salary even more, paying much less taxes overall.
- you can hire your wife as an assistant or whatever you need and pay her a salary (for example 2x30万円/month is more tax efficient than 1x60万円/month because you pay taxes separately in Japan)
- probably there are other creative ways to use that cash

Now the next question is: I want to retire/leave, etc... how do I get my money out of the company?

There is the taishokukin system. It was a setup as retirement bonus system for long time employees, but company directors can use it too when they close the company. Here is the official calculation page: https://www.nta.go.jp/publication/pamph ... l/02_3.htm

When you pay a taishokukin, the receiver pays taxes on it but the taxable amount is reduced by some ridiculous proportions:
- first you get a tax free allowance for 40万円 per year of work in your company. so 10 years => 400万円 are not taxable (it's 70万円 for every year after 20th)
- then you half that, just because
- finally you apply the tax rate on it

If you give yourself a 2000万円 taishokukin after doing your business for 10 years, the tax due will be 121万円 or about 6%.

You can also choose to keep a zombie company and pay yourself a salary every month until retirement age.

My in laws had a successful steel company and invested their profits in rental real estate. Now they just draw a salary from the rental profits every month. I'll probably go back to Europe when I retire, so I think cashing out as a taishokukin will be better.

Taishokukin may have consequences on drawing out from IDECO if you do both at the same time, but I don't know those details.

[AreTheyTheLemmings?]

Following this thread with interest and hoping for lots of suggestions because I'm in a similar situation.

[mikele3]

When you pay a taishokukin, the receiver pays taxes on it but the taxable amount is reduced by some ridiculous proportions:
- first you get a tax free allowance for 40万円 per year of work in your company. so 10 years => 400万円 are not taxable (it's 70万円 for every year after 20th)
- then you half that, just because
- finally you apply the tax rate on it

If you give yourself a 2000万円 taishokukin after doing your business for 10 years, the tax due will be 121万円 or about 6%.

I do not get the math (and the "then you half that, just because" sentence)....

so you work for 10 years and close the business.
￥400,000 x 10 years = ￥4,000,000
but you take home ￥20,000,000

that is ￥16,000,000 on top of your tax free allowance
6% of ￥16,000,000 is ￥960,000

or is the taxable part ￥16,000,000 + 50% of your "tax free" allowance?
6% of ￥18,000,000 is ￥1,080,000

how do you get ￥1,210,000 ?

to be clear... are you saying that you can have the extra cash (on top of the yearly 40万円 and later 70万円) that you have in your bank when closing and it is only taxed 6% and and not as income (33％ for ￥16,000,000) ?

[mikele3]

Have established a KK here in Japan (only one employee - me) which is in its second year now. Our accountant has set up a company pension and I get paid a basic salary. My question is what can I do with the excess money in the business? At present, it is just sitting in the bank and not working in any way. Is it possible to invest this extra cash or top up the pension in a tax-efficient way? I am finding it hard to ask these questions with my accountant and not being able to find the information I need is incredibly frustrating.

What seb said, plus, there is a program for KK owners where you can set apart up to ¥70,000 a month from your salary, but before income taxes, in a fund, until you close the business ... at that point you can have the full amount back and will have to pay some tax on it, but afak less than what would have been if they were taxed with the rest of your salary.

I'll try to find the details about it and post them here later.

[RetireJapan]

What seb said, plus, there is a program for KK owners where you can set apart up to ¥70,000 a month from your salary, but before income taxes, in a fund, until you close the business ... at that point you can have the full amount back and will have to pay some tax on it, but afak less than what would have been if they were taxed with the rest of your salary.

I'll try to find the details about it and post them here later.

It also works for sole proprietors

https://www.retirejapan.com/blog/the-me ... ving-plan/

[mikele3]

nice! thank you.

This RetireJapan blog post didn't come up while I was researching it on google.

Very useful resource!

[seb]

When you pay a taishokukin, the receiver pays taxes on it but the taxable amount is reduced by some ridiculous proportions:
- first you get a tax free allowance for 40万円 per year of work in your company. so 10 years => 400万円 are not taxable (it's 70万円 for every year after 20th)
- then you half that, just because
- finally you apply the tax rate on it

If you give yourself a 2000万円 taishokukin after doing your business for 10 years, the tax due will be 121万円 or about 6%.

I do not get the math (and the "then you half that, just because" sentence)....

so you work for 10 years and close the business.
￥400,000 x 10 years = ￥4,000,000
but you take home ￥20,000,000

that is ￥16,000,000 on top of your tax free allowance
6% of ￥16,000,000 is ￥960,000

or is the taxable part ￥16,000,000 + 50% of your "tax free" allowance?
6% of ￥18,000,000 is ￥1,080,000

how do you get ￥1,210,000 ?

to be clear... are you saying that you can have the extra cash (on top of the yearly 40万円 and later 70万円) that you have in your bank when closing and it is only taxed 6% and and not as income (33％ for ￥16,000,000) ?

I suggest you look at the link in my post if you can understand the Japanese (but it's mostly numbers so it's not that hard.

If you take home ¥20,000,000 after 10 years, you have indeed a ¥4,000,000 tax free allowance that lowers the base to ¥16,000,000. Then indeed I was not clear, but you are only taxed on half those ¥16,000,000, so you calculate your taxes based on ¥8,000,000 only.

The table lower on the page gives the rate for ¥8,000,000: tax due is ¥8,000,000*23% - ¥636,000 = ¥1,204,000.

[mikele3]

I suggest you look at the link in my post if you can understand the Japanese (but it's mostly numbers so it's not that hard.

I did and used Chrome translation to read through it... I guess the part I missed is in the image.

If you take home ¥20,000,000 after 10 years, you have indeed a ¥4,000,000 tax free allowance that lowers the base to ¥16,000,000. Then indeed I was not clear, but you are only taxed on half those ¥16,000,000, so you calculate your taxes based on ¥8,000,000 only.

The table lower on the page gives the rate for ¥8,000,000: tax due is ¥8,000,000*23% - ¥636,000 = ¥1,204,000.

All clear now. Thank you!
Wow! I had no idea half of the remaining cash account would be tax exempt.

Hopefully I'll stay in business for many more years, but I am going to write to our accountant to confirm that would be the case also for us...

I don't know why, but every year I budget around some tax projection and I end up disappointed at taxation time.. there always is something new or special or an exception

[mikele3]

my accountant confirmed that reasoning is correct... I am beyond happy having learned something new and so important
^____^