Severance Tax in Japan With 5 Years of Service or Less: When the 1/2 Rule Doesn't Apply

Severance falls into three categories

The retirement income deduction itself (400,000 yen × years of service up to 20 years, with a minimum of 800,000 yen) works the same way in all three. What differs is whether you can apply the 1/2 after subtracting it. The rules exist to stop people from collecting large severance after a short stint at a light tax rate. The specified-officer rule has applied since the 2013 tax year and the short-term rule since 2022.

Short-term: company employees with 5 years of service or less

For non-officers with 5 years of service or less, the first 3 million yen left after the deduction is still halved, but anything above that isn't. With 10 million yen of severance and 5 years of service, the 2 million yen deduction leaves 8 million yen. Half of the first 3 million is 1.5 million yen, and adding the remaining 5 million gives taxable retirement income of 6.5 million yen.

At 5 million yen or less, the difference comes from the 400,000 yen gap in the deduction, not from the 3 million yen rule. As long as the amount after the deduction is 3 million yen or less (up to 5 million yen of severance at 5 years of service, or 4.2 million yen at 3 years), the calculation is the same as for general severance. The rule bites once severance exceeds the deduction plus 3 million yen.

Specified officers: officers, legislators and public servants

If you have 5 years or less as an officer, severance for that period is taxed on the full amount after the deduction, with no 1/2. "Officer" here covers more than company executives. Legislators and public servants are included too.

• Directors, executive officers, accounting advisors, auditors, board members, inspectors and liquidators of corporations
• Members of the national Diet and local assemblies
• National and local public servants

With 6 or more years as an officer, the calculation is the same general one employees get: (severance − deduction) × 1/2. An officer's severance is taxed more heavily only when they step down within 5 years of taking the post.

If you went from employee to officer

If you worked as an employee, became an officer, and left with 5 years or less as an officer, the severance is split into the officer period and the rest, and each part is calculated differently. The retirement income deduction is split by period as well, so the calculation gets complicated.

• If the officer period is more than 5 years, the whole amount is treated as general
• The employee portion is short-term if that period is 5 years or less, and general if it's 6 years or more
• If your employee severance was paid out when you became an officer, the officer severance counts only the officer period as years of service

If you need this kind of split calculation, check with your company's accounting staff or the tax office. The basic flow is the same in every category. See the retirement income deduction for how the deduction is worked out, and the retirement income declaration form for how to submit the form.

Comparing 4, 5 and 6 years of service

What decides whether the short-term rule applies is whether your rounded-up service is 5 or 6 years. For company employees (non-officers), the tax at each severance amount looks like this.

From 4 to 5 years, the only change is the extra 400,000 yen of deduction. From 5 to 6 years, the 1/2 applies to the whole amount, and the tax falls to less than half. Since leaving just past the 5-year mark counts as 6 years, it can make a big difference whether you can set your last day on or after the fifth anniversary of your start date.

FAQ

Is severance taxed more heavily with 5 years of service or less?

Yes, if the amount left after the deduction is over 3 million yen, because the 1/2 doesn't apply to the part above that. On 10 million yen of severance, the tax is 1,540,822 yen at 5 years of service and 719,482 yen at 6. If the amount after the deduction is 3 million yen or less, the calculation is the same as usual.

How does the 3 million yen in the short-term rule work?

Of the amount left after subtracting the retirement income deduction, the first 3 million yen is halved and anything above it is added in full. With 8 million yen after the deduction, retirement income is 1.5 million + 5 million = 6.5 million yen.

How is officer severance taxed?

With 5 years or less as an officer, tax is charged on severance minus the deduction, without the 1/2 (the specified-officer rule). With more than 5 years as an officer, it's calculated with the 1/2, the same as for employees.

Are public servants covered by the specified-officer rule?

Yes. National and local public servants, Diet members and local assembly members all count as officers, so severance received with 5 years of service or less doesn't get the 1/2 reduction.