Introduction
Stock options are considered, under Japanese tax law, as the rights granted by a company to its employees and officers, or those of its subsidiaries, to purchase the company's shares at a predetermined exercise price within a specified period.
The taxation relationship is defined very complexly, spanning the Income Tax Act, the Special Taxation Measures Act, the Corporation Tax Act, and others.
1. Key Factors for Tax Treatment
① Resident foreigners
Foreign nationals who are considered tax residents in Japan are generally subject to the same tax rules as Japanese nationals. However, depending on whether they are classified as permanent or non-permanent residents, the scope of taxable income differs.
For non-permanent residents, foreign-source income is exempt from Japanese taxation unless (1) it is paid in Japan, or (2) it is remitted into Japan.
② Foreign Unlisted Companies
Where the stock option is granted by a foreign company, considering the nature of the origin of stock options (SO) lies in the provision of personal services, the classification of income for international tax purposes (e.g., whether the grantee is an officer, employee, or consultant) may affect the taxation.
In addition, if it falls under a foreign parent company, there may be a reporting obligation imposed on the head of the domestic corporation or branch office.
2. General Tax Treatment
① Taxation of Stock Options for Residents
While the influence of non-permanent resident factors can be considered, in principle, resident foreigners are subject to the same taxation as Japanese residents. However, since the granting entity is a foreign corporation, such options generally do not qualify as tax-qualified stock options, and thus are often treated as taxable at the time of grant under Japanese tax law.
② Stock Options of Unlisted Companies
Similar to non-qualified stock options issued by Japanese private companies, the tax treatment is affected by the fair value of the option and whether it is granted with or without payment.
3. Comprehensive Tax Considerations
Although taxation at grant is theoretically possible, in practice, it is difficult to impose due to valuation issues and the lack of immediate liquidity. As a result, it is commonly understood that no taxation arises at the time of grant in practice
In addition, reporting obligations regarding economic benefits provided by foreign parent companies are generally required at the time of exercise, not at grant. If the foreign unlisted company has no permanent establishment in Japan and does not meet the definition of a “parent company,” such reporting may not be required at all.
Therefore, in practice, stock options granted by foreign unlisted companies typically do not trigger taxation at grant.
However, following the 2019 tax reform in Japan, the scope of exit tax was expanded to explicitly include stock options. Under this system, a Japanese resident holding stock options granted by a foreign parent company may be subject to tax on unrealized gains if they emigrate from Japan. The applicable tax burden is effectively around 20% (Income Tax 15% + Inhabitant Tax 5% + Reconstruction Special Income Tax).
Accordingly, the tax implications at the time of exercise or transfer can become significantly more complicated. A more detailed analysis of these issues will be provided separately.
We are providing Support for stock options from foreign parent companies in English.