Companies that pay rent for their employees or directors (board members) should consider taxation on salaries as it varies depending on how the rent is to be paid. If the rent is paid as a housing allowance, the taxable amount will increase while the allowance is added to the salary. However, the tax will not be applicable as salary income if a company provides company-housing under certain circumstances. When leasing a company-housing to the director, conditions of housing such as the size of the property (240㎡) and luxury interiors included are concerned with taxation on the director’s salary.
How do companies provide housing for employees/ board members – Executives, directors?
Companies usually provide housing by one of the following three options. The point to know is that taxation applied to salary is determined depending on which one is selected.
The three options for housing provision are;
1. Company pays a housing allowance
2. Company provides a company-housing to employees/the directors for free.
3. Company provides a company-housing and leases to employees/the directors.
Company pays a housing allowance
This is where employees rent a house by themselves and receive a housing allowance from their company. Suppose you rent a house at 200,000 yen/month and your company pays you 50,000 yen as a housing allowance. In this case, tax on your salary income increases while 50,000 is added to the amount. Furthermore, you and your company will need to pay more social insurance premiums as it is calculated based on the amount of your salary, which means it is in a lose-lose situation.
Company provides a company-housing to employees/directors for free
This is a circumstance where employees/directors live in a company-housing without paying rent. Although a housing allowance is not paid, taxation is applicable to an amount which is equivalent to rent or “Rent-equivalent value 賃貸料相当額.” For example, even if your company provides you with an apartment for free, a certain amount will be taxed on your salary.
Company provides a company-housing and leases to an employee/director
A company provides a house and leases to an employee/director. In this case, taxation is not applicable as salary income if the company receives a fixed monthly rent from the employee/director and the rent exceeds the rent-equivalent value. For example, your company leases a house from a third party with a rent of 300,000 yen and offers you to live with a rent of 100,000 yen; the rent-equivalent value is not taxed on your salary as long as the value is lower than 100,000 yen.
Calculation of Rent-equivalent value
Firstly, note that the rent-equivalent value is calculated based on the standard taxable amount of property tax, which you need to know beforehand. Under Japanese law, the rent-equivalent value is calculated by one of the following – (A) and (B), in accordance with the type of housing and who to lease.
To find which calculation is applied, check whether the company-housing is for an employee or a director. In leasing housing to an employee, the rent-equivalent value is calculated only by the calculation (A). As for accommodation for directors, the value is calculated by (A) or (B).
Calculation (A) for;
Company-housing for employees
Small company-housing for directors
| The rent-equivalent value is the sum of (1)+(2)+(3) (1) (Standard taxable value of property tax for BUILDING) x 0.2% (2) 12 JPY x (Gross floor area(㎡)/3.3 ㎡ ) (3) (Standard taxable value of property tax for LAND) x 0.22% |
Determination
If a company leases housing to an employee or leases a small housing to a director, from whom the company receives a rent over the sum of (1)+(2)+(3), it is not taxable as employee’s/ director’s salary. If the rent is less than the sum, taxation applies to the balance.
Suppose you lease a company-housing and pay a rent of 12,000 yen to your company. If the rent-equivalent value is 10,000 yen, the amount is not taxed on your salary because the value is lower than your rent. In the case that you pay only 3,000 yen, which is less than the rent-equivalent value of 10,000 yen, the balance is calculated from 10,000 – 3,000 = 7,000 yen, and it is taxed on 7,000 yen as your salary income.
Also, for employees (excluding board members) who pay rent to the company over 50% of the rent-equivalent value, it is not taxable on the balance even if the rent is lower than the equivalent value. For example, if you are an employee who pays a rent of 6,000 yen to your company, and the rent-equivalent value is 10,000, it is not taxed on the difference of 4,000 yen as the rent is over 50% of 10,000 yen.
Calculation (B) for;
Not-small housing for directors (board members)
In leasing a NOT-small housing to a director, the rent-equivalent value is to be calculated by one of the two methods mentioned below, depending on whether the company housing is owned by the company or by a third party.
1. Company owns a company-housing
| The rent-equivalent value is 12% of the sum of (1)+(2) (1) (Standard taxable value of property tax for BUILDING) x 12%* *It can be 10% for building with legal durable years over 30 years, (2) (Standard taxable value of property tax for LAND) x 6% |
２．Company-housing is owned by a third party
| To find a rent-equivalent value, compare the amounts below. The larger is applicable as the rent-equivalent value. – 50% of the rent paid by the company to the landlord – The rent-equivalent value calculated at the section above “1. Company-housing owned by the company.” |
What are the criteria for determining “Small housing”?
When a company leases a house to a director on the board, the size of company-housing, whether small or not, is crucial as it is concerned with taxation.
Under Japanese law, the size of company-housing is determined based on its legal durable years (法定耐用年数) and the floor area. In the case of a compartmentalized ownership building, the shared area is divided proportionally and added to the floor area.
Small housing is defined as;
A housing with legal durable years under 30 years and the floor area is smaller than 132 square meters.
A housing with legal durable years over 30 years and the floor areas is smaller than 99 square meters.
This definition does not apply to luxury housing.
Housing with a floor area exceeding 240 square meters is determined as luxury housing. Additionally, even accommodation with a floor smaller than 240 square meters may be luxury housing if the building includes lavish interiors or luxurious facilities. It seems not easy to clarify what to be considered “luxurious,” but a swimming pool in the garden or a large chandelier will be one.
In terms of luxury housing, the rent-equivalent value is not calculated by Calculation (B). The rent-equivalent value for luxury housing is equal to the rent supposed to be paid.
Please keep in mind that here mentioned in the article is just a reference. It is advisable to consult a specialist to determine the scale of the house properly.
Information
Japan Tax Agency: Article No.2600 Leasing a company-housing to a member of the board (Japanese website)
https://www.nta.go.jp/taxes/shiraberu/taxanswer/gensen/2600.htm