Case 14
<Question>
I operate a medical corporation in Tokyo, and business has been getting better recently. I am thinking of hiring my wife and children as employees or officers to reduce the total tax amount. Are these salaries deductable for tax purposes? Additionally, my wife will do clerical work at the hospital once a week; however, my children do not work as they are students.
<Answer>
The tax authority pays special attention to salaries given to families of family-run operations. It is an area of special consideration. This is because these companies tend to confuse the companies’ transactions with private transactions, and especially because this tactic makes it possible to reduce the companies’ profit (it is called the transfer of income). This is why the tax authority pays a lot of attention to salaries given to relatives, as well as, entertainment expenses, which could lead to a transfer of income.
In this case, the salary to your wife would be admitted to a certain extent based upon the work factor; however, the salaries to your children would never be admitted as they do not provide any service to the hospital. Regarding your wife’s salary level, a definitive amount is not explained by the tax authority, though it is said that a socially-accepted salary based upon her work is admitted. The definition of a socially-accepted salary is very obscure, but generally it should be decided based upon work difficulty, complexity, contribution to a growing business, and other salaries in the same field. If the hospital has employment regulations and a salary table, your wife’s salary had better be decided based upon it. As mentioned above, there is no definitive guidance of the salary level by the tax authority although the following judicial precedents could be some of help.
Precedent 1
Controversial officer: Business owner’s mother as a part-time officer
Officer’s work: Basically nothing. The owner insisted that the mother acted as
a consultant to the business orally.
Monthly Salary: JPY 500,000
Result: Her job description was unclear and the services performed too subjective. Also,
the business owner had no supporting documents to prove that she worked at the company. The authorities decided that only JPY 150,000 of the JPY 500,000 could be claimed as salary, and disallowed the rest.
Precedent 2
Controversial officer: Business (hospital) owner’s child as a part-time officer
Officer’s work: Basically nothing. The owner insisted that the child provided
“information services” to the hospital, by updating it with the latest
medical practices.
Monthly Salary: JPY 300,000
Result: The tax authority investigated the son’s attendance records at school and
concluded he could not have worked at the hospital. The tax authorities
disallowed the full JPY 300,000.
The above examples show that recording factual transactions and not engaging in disguised accounting practices is important. The preparation of supporting documents, including board minutes and meeting notes, which prove the payment is valid are also necessary.
By Certified Tax Accountant (CPA) & Tax accountant, Koji Takahashi,
Tokyo & Yokohama
