More real estate owners and high-income earners are considering establishing asset management companies. The core reason is a tax-saving strategy that takes advantage of the gap between the top combined individual income and resident tax rate of 55% and the effective corporate tax rate of 20% to 30%. This article reviews the tax rate differences between asset management companies and individuals, the benefits of incorporation, and key points to keep in mind.
What Is an Asset Management Company?
An asset management company is a corporation established by the asset owner to manage assets such as real estate and stocks. Because individual income tax is progressive, the tax burden rises as income increases, reaching as high as 55% including resident tax. By switching management to a corporate entity, this tax burden can be reduced substantially.For those with income exceeding 9 million yen, the tax-saving effect of establishing a company is considered particularly significant.
How Do Individual and Corporate Tax Rates Differ?
Let us compare with a concrete example. If someone with annual income of 10 million yen earns an additional 2 million yen from real estate operations:
- For an individual:the progressive tax rate applies to the total 12 million yen, resulting in approximately 2.42 million yen in income tax, including resident tax
- Through an asset management company:the 2 million yen in real estate income is subject to 19% corporate tax (for income up to 8 million yen), or about 380,000 yen, bringing the total to about 2.14 million yen
This creates a tax saving of about 280,000 yen. The higher the real estate income, the greater this gap becomes.
Taxes Imposed on Asset Management Companies
Corporations are subject to corporate tax, corporate resident tax, and corporate enterprise tax on their profits. Corporate resident tax is roughly 70,000 yen per year at minimum even if the company is operating at a loss, so a simulation that reflects establishment and maintenance costs is necessary.
Taxes on Individuals and the Effect of Income Splitting
If the profits of an asset management company are distributed to family members as executive compensation, the taxable amount per person can be reduced. Because no income tax is imposed when annual income is 1.03 million yen or less, making family members employees can produce an effective tax-saving benefit.However, salary payments to relatives who do not actually work are not recognized as deductible expenses.
How Real Estate Income Is Calculated
Real estate income = total revenue - necessary expenses (such as management fees and repair costs). If you have filed an application for blue return approval, you may also deduct the special blue return deduction (up to 650,000 yen).
Does Establishing an Asset Management Company Also Help with Inheritance and Gifts?
Yes, the tax-saving effect also extends to inheritance and gifts. Paying salaries to family members is a means of transferring assets without gift tax, which also makes it effective as an inheritance planning measure. However, salaries paid to relatives with no actual work involvement may create a tax risk as a “deemed gift.”
When Is Gift Tax Relief Not Available?
Even if salaries are distributed to many relatives with the 1.03 million yen income tax threshold in mind, they will not be recognized as expenses without actual work involvement, and the full amount will be taxed as the founder’s income. Formal employment relationships created solely for tax savings increase the risk of a tax audit.
Frequently Asked Questions (FAQ)
Q. Who is well suited to establish an asset management company?
Individuals with income exceeding 9 million yen, especially those with annual real estate income of 2 million yen or more, are more likely to benefit from tax savings.
Q. Is corporate resident tax payable even when the company is in the red?
Yes. The per-capita levy portion of corporate resident tax is about 70,000 yen per year at minimum, regardless of whether the company has profits.
Q. What should be kept in mind when making family members employees?
There must be a genuine work relationship. Salary payments without actual work involvement risk being denied as deductible expenses.
Q. Can an asset management company also be used for inheritance planning?
Yes. Asset distribution through salary payments can be achieved without gift tax and can also help reduce the size of the taxable estate.
