Companies often rent an apartment and provide this to its employees either as benefit or part of compensation. In such cases, because the employee receives economic benefit, the amount of taxes he/she bears increases (on a monthly basis because the rent is usually paid by the company on a monthly basis). However, as there are exceptions to all hard rules, there is an exception to this one too: if the employee bears a sufficient portion of the rent (usually done through payroll withholding), the employee faces no tax implications. This is what is known as legal rent.
Sufficient amount to be withheld from an employee’s paycheck is calculated as follows:
Sufficient amount = (Actual rent paid) x (certain percentage)
Question then is, how much should this certain percentage be? Many companies set this at a flat 10% (example 1 below), whereas aggressive companies set it at 5% (example 2 below) and conservative companies set it at 15% (example 3 below).
Example 1 Actual rent paid is 250,000 yen and the company applies a 10% rate 250,000 yen x 10% = 25,000 yen
Example 2 Actual rent paid is 250,000 yen and the company applies a 5% rate 250,000 yen x 5% = 12,500 yen
Example 3 Actual rent paid is 250,000 yen and the company applies a 15% rate 250,000 yen x 15% = 37,500 yen
What you must be aware of is that there is a risk involved in this calculation method. The risk materializes when the employee is not bearing sufficient portion of the actual rent paid by the company. But not enough based on what standard? This is the toughest part. The standard is computed using the assessed value of the apartment and the land for property tax purposes along with the total area of the property. Assuming that the three values have been collected, applying them to the examples 1 thru 3 above reveals the following result.
Assessed value of apartment for property tax purposes = 10,000,000 yen Total area of property = 55 m2 Assessed value of land for property tax purposes = 11,000,000 yen
10,000,000 yen x 0.2% + 12 yen x 55 m2 / 3.3 m2 + 11,000,000 x 0.22% x 50% = 32,300 yen
The simplified calculation method introduced at the beginning multiplies a certain percentage on the actual rent paid and require employees to bear this amount. However, using the formal method reveals that 5% or even 10% withholding is not enough. Rather, the company needs to withhold 15% of the actual rent paid. If the company has neglected to withholding income taxes on the rent paid assuming that no tax implications existed because the employee has been bearing sufficient portion of the rent, the company may be in trouble. Because legal rent is an area where insufficient withholding is common, the Tax Office auditors will most likely look into the propriety of your company’s tax treatments.
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Below are links to Certified Social Insurance and Labor Consultants providing services in English. Also below are useful links related to working in Japan and links to women balancing career and personal happiness. WJA realizes and promotes women's increasing value in the labor market.