How does income tax work for self-employed consultant under G.K

[twhi]

I've been trying to learn about income tax if setup a G.K. to work as a self-employed consultant. I could use some help me understand the following.

1. I believe the income will fall under corporate income tax as described on this JETRO webpage.
2. I assume that I can receive the income from my G.K. without also owing personal income tax in Japan.
3. As a US citizen, would I owe income tax to the US on the earnings? If so, how will it taxed in the US and will I be able to claim FTC? (I am concerned that if Japan applies corporate income tax on the G.K. and the US taxes personal income, FTC won't apply and I will be double taxed.)
4. Would accepting payment in a US bank account from US clients complicate the taxation considerations? And would the answer change depending on whether I remit the money to Japan or not.

 

[phillev]

@twhi I’ll just tackle questions 1 and 2. The word “income tax” implies personal income. A GK is a corporation, a separate entity from yourself as an individual, and therefore is subject to “corporate tax”. However, it’s normal to “employ” yourself at the GK (just like you’d be employed at any other company), and pay yourself a salary. Of course, this salary would be subject to income tax, as well as social insurance and so on.

Of course, you don’t have to employ yourself at the GK. It’s possible to not employ yourself (also known as zero salary), and then you’d just pay a lot more in corporate taxes, but no income tax. However, it would be more difficult to use the company’s money freely.

Paying yourself a salary is the cheapest and easiest way to get money out of the company. You can’t use the company’s money freely for your personal expenses, of course. You could only use it for business expenses. Therefore, if you want to be able to use the money freely for yourself, you’ll have to pay yourself a salary (which has to be the same amount every month for the fiscal year and you’re only able to change it at the start of each fiscal year, so you need to think carefully about how much to pay yourself). Usually, a corporation’s biggest expenses are, you guessed it, salaries.

 

[kitten3660]

@phillev Just to expand on this, you can’t use money freely for personal expenses but some expenses can be shifted from personal to business (of course within reason and depends on the business.
That includes

• everything around your home office
• laptop, hardware, software
• mobile phone
• internet and mobile phones expenses
• utilities to a degree
• if you’re renting, then part of your rent

 

[cavitill]

@kitten3660 What are the rules in Japan for use of a car whether it be a lease or bought?

 

[phillev]

@cavitill You can count a lease as regular expenses.

If you buy a car, you have to depreciate it over 6 years for a regular new car or 4 years for a new Kei car. You can depreciate it all in one year if it’s more than 4 years old. You can also expense insurance, gasoline etc as regular expenses.

 

[kitten3660]

@cavitill I am not familiar very familiar with that.

If you buy/lease the car through the company, it's a company expense but I am sure you'd have to somehow proof that you use it for business and not primarily for personal use.

If you use your current car for business purposes, you could expense gasoline, parking, ETC. but again that would have to be within reason and you might have to document when you used it for what purpose. Not an expert on this though.

 

[twhi]

@phillev Thanks for the explanation, it's really helpful for my understanding. It sounds like I will have the flexibility to either (1) take all income as salary and pay only personal income tax, (2) take no salary and pay only corporate tax, or (3) take partial salary and pay personal income tax on the salary and corporate tax on the remainder. Did I get it right?

Regarding the term "corporate income tax", I think corporate tax is technically considered income tax. NTA, JETRO, PWC, Deloitte, and others refer to "corporate income tax" and "tax on corporate income". This certainly doesn't take anything away from your reply, but I want to clarify why I referred to it as "corporate income tax".

 

[phillev]

@twhi Yes, the first part of what you said is right. There are some interesting tables on this page (go to the bottom and choose different levels of profit for the company), which show the most efficient salary for each level. However, the most efficient salary maxes out at 5m yen. Sometimes you have to accept that what you’re doing might not be the most efficient, but it’s appropriate for you. Anyway, it gives good food for thought about how the balance between personal taxes and corporate taxes could be.

The difficulty is, unless you already have one year contracts beforehand, it’s difficult to predict how much profit you’ll have in the whole year at the beginning of the year (when you have to decide the salary), so many people underestimate their profit in the first year to be on the safe side, then adjust appropriately from the second year.

Regarding the terminology, that’s fine, no problem, it’s just semantics of translations. As long as we know we’re talking about 法人税 and 所得税.

 

[twhi]

@phillev Thanks. The link isn't working for me, but it's good to know that I have the right concept.

 

[twhi]

@phillev

The difficulty is, unless you already have one year contracts beforehand, it’s difficult to predict how much profit you’ll have in the whole year at the beginning of the year (when you have to decide the salary), so many people underestimate their profit in the first year to be on the safe side, then adjust appropriately from the second year.

This difficulty applies to me. I am expecting part-time consulting work to range from 0 to 6 months, and I won't know in advance how much work I will get.

Could I just pay myself as a part-time employee? Or is that not feasible?

Another idea is to pay myself in the following year if the accounting rules allow me to apply the expenses to the profit in the previous year. I have no idea how business accounting rules work, so don't beat me up if that's a stupid question.

Hopefully I can find some way to make this work. My income will likely be much higher than the breakeven between GK and sole-proprietorship, so I have a lot to lose (or gain, depending how you look at it).

 

[phillev]

@twhi You can’t apply expenses to the previous year. Only the current year.

You can set your salary to however much you want. There’s no minimum wage for directors. Zero would also be acceptable. If you’re going to pay a salary, 50,000 yen a month would be a good minimum, though, thinking about Shakai Hoken premiums. You should calculate for your own situation how much would be reasonable when deducting residence tax and Shakai Hoken not to leave you with a negative salary, ie you would have to pay the company!

Another workaround would be to just work as a sole proprietor for the first year or two and then switch to a corporation after that. This way, you’ll have a good idea of your income, and you won’t have to worry about salary stuff. Also, even if your sales are over 10 million yen, you won’t have to pay consumption tax for the first 2 years as a sole proprietor, and then a further 2 years if you switch to a corporation.

Again, this is presuming you want to set up a corporation at all, considering the difficulties of taxes on the American side.

 

[reflectionsbythewater]

@twhi

1. A GK is not a pass through entity. If the company has a taxable profit and accumulated retained earnings, you can take a distribution but this is called a dividend and is taxable income to you. So first you pay the corporate income tax, and then pay individual income tax on the dividend. The dreaded double taxation.
2. The foreign connected income of a foreign corporation would not normally be taxable to you as an individual US citizen, but there are some pretty onerous reporting requirements for a US citizen who owns or controls a foreign company. You will definitely want to consult with a US tax professional who is familiar with foreign corporate issues.

There are situations where certain kinds of income, such as passive income, can flow through and end up being taxable on your individual US filing. Again, you would want a US tax pro consulting with you to avoid these pitfalls.

1. Does the US bank account belong to the corporation? Because if that's your personal bank account you are receiving corporate revenue into, you owe that money back to the company. It does not belong to you. It doesn't matter if you remit to Japan or not. It doesn't even matter if you've received payment or not. All sales are reportable in the year completed on an accrual basis. If you don't know what accrual basis means, you need to consult with an accountant.

In fact, I would recommend having a long talk with an accountant about the multitude of issues raised here on both sides of the Pacific.

 

[twhi]

@reflectionsbythewater Thanks for the detailed reply!

1. A GK is not a pass through entity. If the company has a taxable profit and accumulated retained earnings, you can take a distribution but this is called a dividend and is taxable income to you. So first you pay the corporate income tax, and then pay individual income tax on the dividend. The dreaded double taxation.

That's what I was afraid of. I'm having trouble seeing why anyone would want to setup a GK for their consulting work if they don't have significant expenses compared to their income, which is probably rare.

1. The foreign connected income of a foreign corporation would not normally be taxable to you as an individual US citizen, but there are some pretty onerous reporting requirements for a US citizen who owns or controls a foreign company. You will definitely want to consult with a US tax professional who is familiar with foreign corporate issues.
   
   There are situations where certain kinds of income, such as passive income, can flow through and end up being taxable on your individual US filing. Again, you would want a US tax pro consulting with you to avoid these pitfalls.

Having to pay an accountant to deal with the extra complexity is another reason why I can't understand why someone would want to use a GK for personal consulting work.

1. Does the US bank account belong to the corporation? Because if that's your personal bank account you are receiving corporate revenue into, you owe that money back to the company. It does not belong to you. It doesn't matter if you remit to Japan or not. It doesn't even matter if you've received payment or not. All sales are reportable in the year completed on an accrual basis. If you don't know what accrual basis means, you need to consult with an accountant.
   
   In fact, I would recommend having a long talk with an accountant about the multitude of issues raised here on both sides of the Pacific.

That's exactly the kind of thing I was worried about. Thanks!

 

[phillev]

@twhi Ok, I’ll tackle question 4 too.

It would be a bit complicated. You’d have to log your sales in yen at the TTM rate on the date of the sales. You’d also have to log any FX gains or losses either when you remit the money to Japan or at the end of the fiscal year. Having multiple currencies is a bit of a nightmare, and might necessitate having a tax accountant for that point alone, unless you’re good with numbers and accounting by yourself.

 

[leehop71]

@twhi What are the advantages of using GK instead of KK or self-proprietorship for self employed consultant? It seems to me GK may be more complex, with more paperwork, professional services expenses (accountant, lawyers, corporation filings, etc). I don’t see any benefit of GK for a self employed person unless you are going to have employees and contractors, external investors, millions in turnover, excessive liability, and need high level of personal and business separation.