Risks of Setting Low Executive Compensation to Reduce Social Insurance Premiums: An Immigration Perspective#
For foreign entrepreneurs operating companies in Japan, determining the amount of executive compensation (directors’ remuneration) is a critical decision that directly impacts both the company’s financial health and the individual’s personal livelihood. Particularly in the early stages of establishing a company or during periods when sales have not yet stabilized, there is a strong temptation to set executive compensation extremely low. This is often done to preserve the company’s cash flow or to minimize personal income tax, residence tax, and notably, the high cost of Social Insurance premiums (Shakai Hoken), which covers health insurance and welfare pension.
However, while setting low compensation for the purpose of “tax saving and reducing social insurance costs” may seem financially prudent, it invites serious risks of visa denial during the renewal examination for the “Business Manager” status of residence under Japan’s Immigration Control and Refugee Recognition Act. This article provides an objective explanation of why low executive compensation is viewed negatively by the Immigration Services Agency and discusses the specific viewpoints used during the examination process.
The Conflict Between Cost Reduction and Visa Requirements#
From a purely business management perspective, reducing executive compensation to a nominal amount (e.g., 50,000 to 100,000 JPY per month) can drastically reduce the Social Insurance premiums borne by both the corporation and the individual. In terms of tax law, reducing executive compensation to avoid corporate deficits may also be recognized as a rational management decision in certain contexts.
However, the criteria used by the Immigration Services Agency differ fundamentally from the perspectives of the Tax Office or the Pension Office. For a foreign national holding a “Business Manager” visa, the Immigration Agency requires proof of the following two core elements:
- Continuity and Stability of the Business: Is the business being conducted in Japan stably and continuously?
- Financial Independence: Does the foreign national have sufficient income to support themselves in Japan without relying on others or public assistance?
Setting executive compensation extremely low is essentially declaring to the Immigration authorities that “this company’s business scale does not have the capacity to pay the manager a living wage” (casting doubt on business continuity) or “this manager does not have sufficient funds to live in Japan” (casting doubt on the legitimacy of their activities).
The Examiner’s Perspective on “Cost of Living”#
During a visa renewal application, immigration examiners always review the “Certificate of Taxation” (Kazei Shomeisho) and “Certificate of Tax Payment” (Nozei Shomeisho) submitted by the applicant. If the annual income listed on these documents is significantly lower than the general standard of living in Japan, it raises reasonable suspicion.
For example, when living in Tokyo, it is common knowledge that a single person requires a net income of at least 180,000 to 200,000 JPY per month to cover rent, utilities, food, communication, and other basic necessities. If the executive compensation is set at, say, 80,000 JPY per month, the examiner will inevitably ask questions such as:
- “How is the applicant covering the rest of their living expenses?”
- “Is the applicant engaging in activities outside their visa status (illegal work)?”
- “Is the applicant misappropriating company funds for personal use?”
Applicants sometimes attempt to explain this discrepancy by claiming, “I have savings overseas,” or “I receive financial support from my parents.” However, these arguments are often incompatible with the intent of the “Business Manager” visa. This status of residence is granted on the premise that the individual will “manage a business in Japan and earn a livelihood from the remuneration of that business.” Living by depleting savings does not constitute maintaining a livelihood through business management activities.
The Pitfall of Using Company Expenses for Living Costs#
Another common argument is that while the salary is low, the individual maintains their standard of living by having the company cover personal expenses such as housing (company housing), vehicles, and entertainment costs. While these may be valid tax-saving strategies under corporate tax law, they often work against the applicant in immigration examinations.
Immigration examinations place heavy emphasis on the figures that can be proven as “individual income” on official certificates. Living off company expenses does not count towards personal disposable income. If the documented compensation is set at a level below the welfare assistance standard, the applicant is considered to be in a state of “poverty” on paper, regardless of their actual lifestyle. This significantly increases the likelihood of the residence status renewal being denied or the period of stay being reduced to “1 year” instead of 3 or 5 years.
Impact on Dependent Visas#
The issue of low compensation does not stop with the manager alone; it has severe implications if the manager wishes to sponsor a spouse or children under the “Dependent” (Family Stay) visa.
A fundamental requirement for a Dependent visa is that the supporter (the business manager) has the financial capacity to support all family members. If the executive compensation is set so low that it cannot even cover the manager’s own living expenses, it will naturally be judged that there is no capacity to support a family. Consequently, this strategy can lead to a situation where not only is the manager’s visa renewal jeopardized, but the visas for the entire family are denied, forcing them to leave Japan.
Guidelines for Appropriate Compensation Settings#
While there is no legally published “minimum salary amount” for Business Managers, practical experience suggests a benchmark. It is generally necessary to set executive compensation at a minimum of 200,000 to 250,000 JPY per month. From this amount, social insurance premiums and taxes must be properly paid, and the remaining net income must be sufficient to sustain a livelihood. Naturally, if there are dependents, the required compensation must be higher to account for the additional costs.
Furthermore, the consistency between the business plan and the actual compensation is crucial. If a business plan submitted at the time of incorporation projected a substantial salary, but the actual salary is significantly lower, the credibility of the business operations is undermined.
Conclusion#
While setting “low executive compensation” offers the short-term financial benefit of reducing Social Insurance premiums, it becomes a significant risk factor in immigration examinations by suggesting “business instability” and a “lack of financial independence.”
The Japanese immigration system expects foreign residents to be self-reliant members of society who fulfill their tax and social insurance obligations appropriately. Therefore, to maintain the status of residence as a Business Manager, it is essential to understand that the safest and most sincere path is not to avoid social insurance burdens, but to set appropriate compensation commensurate with actual living costs and to fulfill all public obligations. Prioritizing compliance over cost reduction is the key to long-term stability for foreign entrepreneurs in Japan.