(i) upon the date of exercise of the stock option, the difference between the exercise price and the market price was taxed as salary or as transient income (ichiji-shotoku), etc., if the latter is higher; and
(ii) upon the date of transfer or disposition of the shares of stock, a capital gains tax was imposed on any gain (the difference between the market price on the exercise date and the sales price, in case the latter is higher).
Under the amendment to the Japanese tax law, if the stock option meets certain conditions (e.g., the average total exercise price of the stock option per person is Y5,000,000 per year; the stock option is not exercised for one or two years from the date of grant (the restriction period has not been determined); and the grantee is not a shareholder holding more than one-third of all outstanding shares of the company), the income tax described in item (i) above will not be imposed and only the capital gains tax described in item (ii) will be imposed. In addition to the gains from tax deferment, the amendment provides the grantees of stock options with additional tax benefits because progressive income tax rates are generally higher (with very few exceptions) than the capital gains tax rate of 26% applicable to dispositions of stock.
Stock Options to Japanese Employees
If you are a manager of a non-Japanese corporation and have Japanese resident employees or a Japanese subsidiary, you might be interested in granting stock options to such employees. Unfortunately, the Ministry of Finance and the tax authorities have not given any indications that amendments to the Japanese tax laws will be applicable to stock options granted by a foreign company to its Japanese resident employees or to employees of its Japanese subsidiary. If the amendment is not applicable in such circumstances, the current taxation scheme as described in items (i) and (ii) above will apply. In that case, whether the income received on the exercise date is deemed to be salary or transient income will be an important issue. If the income received on the exercise date is deemed to be transient income, half of the amount received (after deducting Y500,000) will be deemed to be taxable income. On the other hand, if the amount received on the exercise date is deemed to be salary, there are no additional deductions other than general deductions.
Other Important Points Regarding Stock Options
Under the Securities Exchange Law, the company granting the stock option is required to file a notification or report (with a prospectus in certain cases) prior to the granting of options depending on the aggregate exercise price and the number of grantees in total (whether 50 or more).
Further, under the former Japanese foreign exchange control laws, the company granting the stock option was required to file prior notifications when a stock option is exercised. The employee was also required to file a prior notification at the time of exercise of the stock option, but only if the total market value of the acquired stock exceeds Y100 million. As a result of the amendment to the foreign exchange laws enforced this April as a part of the "Big Bang" reforms, both of the prior notices mentioned above have become ex post facto reports.
(c) Komatsu, Koma & Nishikawa 1997
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
