• 2023.03.24
  • M&A

Method of providing retirement benefits to directors and corporate auditors in lieu of payment of stock transfer consideration

Taxation of gain on stock transfer

When a director or employee of a company transfers shares of the company, a capital tax equivalent to 20% of the gain on the transfer (stock transfer gains tax) will be imposed. Previously, the tax rate was 10% for shares of listed companies, but now the same rate (20%) is applied regardless of whether the shares are those of listed or non-listed companies. In addition, gains on stock transfers are subject to separate taxation, so they cannot be aggregated with other income (e.g., business income or employment income). Even if business income is negative, if there is a gain on stock transfer, tax must be paid on the gain on stock transfer. However, if multiple stock transfers are made in the same year, the gains and losses will be aggregated among the stock transfers. Since capital gains are determined by deducting the acquisition price from the sale price, it is necessary to clarify what the acquisition price was. If the shareholder is a corporation (i.e., another company is a shareholder), the gain on the transfer is income of the corporation and is therefore taxed as a single corporate tax. If the income of the corporation is negative, it may be more tax-efficient to transfer the shares once to the corporation.

Gift Tax

When a manager retires from a company, he or she may donate shares to a successor. However, it is not advisable to simply make a gift to the successor, as the successor who receives the gift will be liable to pay gift tax. If the successor acquires the shares for fair consideration, no tax will be imposed on the successor.

Acquisition of treasury stock by the company

If the company has sufficient distributable earnings, the company may choose to acquire treasury stock owned by management. There are various procedural restrictions on acquisition of treasury stock by a company in addition to the existence of distributable profit, so please check with your attorney. If the acquisition price of the shares by the company is not appropriate, a deemed dividend tax may be imposed.

Taxes on directors’ severance payment

Income tax and inhabitant tax are imposed on retirement allowances for directors and corporate auditors. Retirement income is calculated by subtracting the retirement income deduction from the amount actually received, and then multiplying this by one-half. The amount of income tax is calculated by multiplying the retirement income by the income tax rate.

Retirement Income Deduction

If the number of years of service is 20 years or less, the amount of deduction is 400,000 yen x the number of years of service. If the number of years of service exceeds 20 years, the deduction is 700,000 yen x (years of service – 20 years) + 8 million yen. In other words, the amount of deduction is the sum of the 8 million yen deduction and deduction after 20th year (700,000 yen per year).

Comparison of Taxation on Retirement Allowance for Officers and Taxation on Gain on Transfer of Stock
For example, if an officer with 20 years of service as an officer receives a retirement payment of 20 million yen, the deduction would be 8 million yen, and retirement income would be (20 million – 8 million) / 2 = 6 million yen. The retirement income tax is calculated by multiplying this amount by the income tax rate and the inhabitant tax rate. In the case of capital tax, on the other hand, a tax of 20% is imposed on the transfer price of 20 million yen minus the acquisition price. Although it is impossible to determine which is more advantageous without doing the calculations, in most cases, it is believed that retirement income will be taxed less. Therefore, in the case of M&A of small and medium-sized companies, the management of the transferor may request that as much severance income as possible be paid and that the transfer price of the shares be reduced by that amount. However, since the retirement income is contingent on the existence of a severance pay policy for directors and officers, the severance income can only be paid to the extent that a severance pay policy exists and is set forth in the severance pay policy.

Limitation on Merit Multiplier

The amount of the executive retirement allowance will be determined by monthly compensation x years of service x contribution multiplier. The contribution multiplier is usually set between 1 and 3 in the executive retirement allowance regulations, but if the contribution multiplier is abnormally high, the tax office may deny the payment. In the past, 3.5 times is the maximum contribution ratio, and if the contribution ratio is higher than this, the risk of denial by the tax office is high. If you really want to increase the retirement allowance for directors, it is preferable to adjust it by increasing the monthly remuneration instead of adding the additional service allowance. However, the compensation of the executive must be the same amount each month, and if the amount of the executive’s compensation fluctuates from month to month, it may not be allowable as an expense.

Calculation of directors’ retirement allowance

Assuming that the merit multiplier is 3, the amount of retirement allowance for an executive who receives 2 million yen per month and retires after 30 years of service would be 2 million yen x 30 years x 3 = 180 million yen.

Notes on the use of life insurance

It is likely that many companies purchase life insurance in order to prepare the source of the retirement allowance for directors and corporate auditors. Life insurance is often used because the premiums are paid annually as an expense, thereby saving taxes, and in the event of the death of a director, a lump-sum payment is made to compensate for any losses incurred by the company due to the director’s death. However, it is necessary to consider carefully before purchasing life insurance whether the company will be able to continue paying the premiums until the life insurance policy matures and how much the surrender value will be if the company is unable to pay the premiums and cancels the life insurance policy in the middle of the term.