Quick Review

Dividends vs. Director Fees


If you are doing business through a company, you must be always thinking about the most tax efficient way to get money back to your personal life. If you are both a shareholder and a director of the company, you may be wondering which way is less taxed, dividends or director fees.


Japan is one of the least friendly countries for company’s owners. First of all, dividends are taxable at individual shareholders’ level. Some countries like Singapore do not impose tax on dividends because dividends are not tax deductible at the company level. In other words, dividends are distributed from the earnings after the company paid corporate income tax. In this regard, it would be double taxation, if dividends are taxed again at shareholders’ level. In Japan, dividends are taxable at individual shareholders’ level while corporate shareholders are exempted if they are major shareholders. Actually, individual shareholders can take some tax credits to ease this double taxation, but not much. Only 10% for the first JPY10 million and 5 % for the above.

While in Japan a subsidiary can reduce by 30% of interest at its tax filing, in Singapore a parent company increase its income tax by only 17% of interest. (According to Singapore tax laws, overseas interest income received in Singapore is not exempted from taxation) As a whole group, 13% (30%-17%) of interest will be gained as tax benefits.
Actually, interest income of the parent company is subject to withholding tax with 20% rate in Japan as interest is deemed domestic sourced income. However, many of tax treaties give concession rate. For example, Japan-Singapore tax treaty let you 10% tax rate applicable on interest instead of domestic tax rate of 20%. Tax authority does not think withholding tax is enough to prevent excessive tax avoiding behavio.

Thin Capitalization Rules:

The thin Capitalization Rules disallow a deduction of the excess interest expense paid or payable to the foreign parent company, if the debt-to-equity ratio exceeds 3:1. The annual average balance of interest-bearing debt to a foreign controlling shareholder exceeds three times the capital contributed by the foreign controlling shareholder, the excess interest expense is not deductible. Borrowings from third parties will be included if the loans are guaranteed by the foreign controlling shareholder.

Who are foreign controlling shareholders? 
A foreign controlling shareholder is defined as a foreign corporation or nonresident individual that (1) directly or indirectly owns 50% or more shareholding in the company, or (2) is a foreign corporation in which 50% or more shareholding is owned by the same shareholder which directly or indirectly owns 50% or more shareholding in the company, or (3) has the power to control the company.​

Transfer Pricing:

You may wish to raise interest rate while keeping the balance within less than 3 times the capital. However, you should be aware of transfer pricing rules. Transfer pricing rules allow tax authorities to adjust prices for cross-border intragroup transactions to what would have been charged by unrelated enterprises.

Earnings Stripping Rules

You should also take into accounts the earnings stripping rules, which are aiming to restrict interest payments that are excessive compared to income. The earnings stripping rules will disallow deductions of the excess interest expense paid or payable to the related affiliates if the relevant interests exceed 50% of income.

(For more details, please read our Quick Review on Earnings Stripping Rules.)

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