If you plan to relocate or move overseas, you will likely wonder when to exercise stock options and when to sell the shares. You might be tempted to think, "If I exercise them while living abroad, I won't be taxed in Japan." However, the conclusion cannot be reached based solely on your place of residence on the day you exercise them. You need to consider separately which system's rights they are, which country's work that profit corresponds to, and what the situation is at the time you sell the shares.

First, arrange four dates

The starting point for organization is the four stages of grant, vesting, exercise, and stock sale. Granting is being given rights, vesting is meeting conditions such as the length of employment or performance, exercising is acquiring shares at a set price, and selling is parting with the acquired shares. Depending on the contract, there may be multiple dates for each stage, and a single grant may vest over the course of several years.

Arranging these four does not mean that Japanese taxes occur at all four stages. It is to accurately capture the taxation timing and the work period corresponding to that profit. If you confuse "vested" and "exercised to acquire shares," the dates for checking the stock price and place of residence will also shift.

First, we will review not only the company's explanatory materials, but also the grant agreement, vesting conditions, exercise notice, and securities account transaction history together. For equity compensation with similar names or management screens but different mechanisms, such as RSUs, it is important not to directly apply stock option explanations.

The timing of taxation changes depending on whether it is tax-qualified or non-qualified.

In Japan's non-tax-qualified stock options, taxation is generally considered at the time of exercise and at the time of stock sale. Gains from the exercise of rights granted based on employment relationships or the like are, in principle, classified as employment income. The basic approach is to separate the profit resulting from the difference between the stock price at the time of exercise and the exercise price from the capital gains resulting from subsequent stock price fluctuations.[1]

On the other hand, if the Japanese tax-qualified stock option system applies, taxation on the economic gain at the time of exercise is deferred and addressed when the shares are sold. The acquisition cost of the shares in this case is the exercise price, not the fair market value at the time of exercise. The explanation that "no tax is incurred at the time of exercise" does not mean that the gain is tax-exempt until the end.[2]

Note that the term "qualified" differs by country. Even if something is eligible for tax incentives under a foreign system, that alone does not make it tax-qualified in Japan. Verify the contract terms and application requirements on the Japanese side, and ensure clarity on which country's system is being explained.

The period of working in Japan remains relevant even after leaving the country.

If the right was earned as a result of working in Japan, Japanese taxation may still apply to the benefits corresponding to that employment, even if the right is exercised after leaving the country. The mere fact that a person lives overseas and receives shares in a foreign account does not sever the connection with Japan.

The National Tax Agency explains that, based on the Japan-U.S. Tax Convention, for cases where a U.S. resident worked in both Japan and the U.S., the portion related to the period of employment in Japan is treated as Japan-source income. However, the method for calculating the period in this case cannot be uniformly applied to residents of other countries or to different contracts.[3]

In practical work, we first confirm the nature of the income under domestic law, and then consider which work period the profits correspond to, based on the applicable tax treaty and the conditions for granting it. When there are multiple countries of employment, not only the assignment order but also the actual work days and business trip history serve as documentation. Simply dividing the total amount into two based on the date of relocation abroad may not provide an explanation that corresponds to the contract.

Nationality/Permanent Residency and tax residency are checked separately.

The basic rule for determining whether someone is a resident for Japanese income tax purposes is whether they have an address in Japan—that is, the center of their vital interests—or whether they have continuously maintained a residence in Japan for one year or more. The center of vital interests is determined based on objective facts such as work, housing, and family living conditions. It is not decided solely by the transfer of one's resident registry.[4]

Having a permanent residency abroad or foreign nationality does not automatically make someone a non-resident of Japan. Conversely, having Japanese nationality does not always mean someone is a Japanese resident. The tax category of "non-permanent resident" also differs from the permanent residency status under immigration laws. We will check the tax scope in Japan, as well as the treatment under the domestic laws of the destination country and tax treaties.[5]

Consideration of exercise and consideration of sale are paired.

Even for tax-qualified rights, selling shares while working overseas does not necessarily mean they are completely exempt from taxation in Japan. The National Tax Agency explains that even if a non-resident without a Permanent Establishment (PE) in Japan transfers shares while working abroad, the transfer of specified shares acquired through tax-qualified stock options falls under the categories subject to Japanese taxation. Treaty adjustments are also separately required.[6]

For schemes that require tax funds upon exercise, whether the shares can be sold immediately is also important. This is because the tax estimate and the liquidity of the shares are separate conditions. Before deciding to exercise, let us list the dates for each stage, the history of residence and work countries, the scheme category, the stock price, and the sales restrictions, and check how the timing and amount of taxation overlap between Japan and the country of residence. By checking both whether the company withholds taxes at source and whether the individual is required to file a tax return, you can reduce rework after moving abroad.

Reference materials

• National Tax Agency: Tax treatment of non-tax-qualified stock options
• National Tax Agency: Transfer of shares acquired through tax-qualified stock options
• National Tax Agency: Scope of domestic source income related to stock options
• National Tax Agency: Classification of Residents and Non-Residents
• National Tax Agency: Individuals who are taxpayers
• National Tax Agency: When shares are transferred while working overseas

Document verification date: September 17, 2026. This is a general organization of issues. For individual transactions, confirmation based on the contract details and the laws and tax treaties in effect at the time of the transaction is required.