“Paid stock options” is not a statutory term. It is a practical name for rights acquired by subscribers paying cash equal to fair market value, rather than issued free of charge. For the general stock option framework, see What is a stock option?.

Statutory definition

“In cases other than that prescribed in the preceding item, the payment amount for share acquisition rights offered for subscription (meaning the cash amount payable for each right; hereinafter the same in this Chapter), or its calculation method.”

Article 238 of the Companies Act requires subscription terms to state that no payment is required where applicable; otherwise, they must specify the quoted “payment amount” or its calculation method. Whether rights are issued free or for consideration is determined within this statutory framework.

Overview

What is the consideration in “paid” stock options?

Companies Act Article 236 lists the terms to specify when issuing share acquisition rights. One is “the value of property contributed upon exercise, or its calculation method,” corresponding to the exercise price. By contrast, Article 238's “payment amount for share acquisition rights offered for subscription” is paid for the rights themselves when subscribed, separate from the Article 236 exercise price. “Paid stock options” refers to setting this Article 238 amount at fair market value rather than zero. Even where a payment amount is specified, if it is “particularly favorable to that person,” directors must explain at the shareholders' meeting determining subscription terms why solicitation at that amount is necessary.

How does the National Tax Agency Q&A explain paid options?

The National Tax Agency's “Taxation of Stock Options (Q&A)” states, in the introduction common to Taxation of non-qualified stock options: “Salary in kind received from an employer is subject to income tax as employment income upon receipt. However, if it consists of transfer-restricted stock options (nonqualified stock options), income cannot be realized by transferring them, so income is not recognized at grant; it is taxed as employment income (note) for the year of exercise (income tax Order, Article 84(3)).” Question 2 then explains paid options as follows.

At purchase, “Because nonqualified stock options (paid type) are purchased at fair market value, no economic benefit arises and no tax consequences arise.” At exercise, Question 2 explains that the benefit “is not recognized under the Income Tax Act,” based on Article 36(2) and Order Article 109(1)(i). For paid options acquired at fair market value, appreciation upon exercise is not taxed then as employment or other income. For a later share sale, the example states: “The share transfer gain is 750: the share price at transfer (1,000) less the sum (250) of the option purchase price (50) and exercise price (200).”

How are the items of Article 84(3) organized?

Article 84(3) of the income tax Order sets revenue calculation rules for rights granted by issuers in items (i) through (iii). Item (iii) covers “rights to acquire shares where the amount payable for the shares is favorable (excluding rights listed in the preceding two items).” It excludes the share acquisition rights in the preceding items, including those issued under resolutions pursuant to Companies Act Article 238(2) or similar provisions on particularly favorable terms or at particularly favorable amounts. Income Tax Basic Circular 23–35 Common-7 defines a “favorable amount” in item (iii) as an amount below a value considered reasonable under generally accepted standards relative to the issuer's share value on the date the payment amount is determined. Note 1 tests whether the difference between share value and the payment amount is approximately 10% or more of share value. The payment amount for the rights themselves under Companies Act Article 238 is outside item (iii), and Circular 23–35 Common-7 likewise does not address share acquisition rights.

Where is the issuer's treatment prescribed?

Corporation Tax Act Article 54-2 governs the business year of issuer expenses, and Order Article 111-3 defines the scope of specified share acquisition rights. For details, see Tax deductibility for the issuing company of stock options will handle.

How does this relate to tax-qualified stock option requirements?

Article 29-2 of the Act on Special Measures Concerning Taxation states that where grantees exercise “share acquisition rights (limited to those prescribed by Cabinet Order; hereinafter ‘share acquisition rights’ in this paragraph)” in compliance with the requirements, “the economic benefit relating to acquisition of those shares shall be exempt from income tax.” Order Article 19-3 defines the prescribed rights as rights issued without requiring cash payment (including contribution of noncash assets) pursuant to a resolution under Companies Act Article 238(2) (including determination of subscription requirements delegated under Article 239(1), and a board resolution under Article 240(1)). National Tax Agency Q&A Question 6 likewise lists the requirement that “the stock options were granted free of charge to directors, etc. of the issuing company.” For all requirements, see What Are Tax-Qualified Stock Options?.

Points that require care in practice

• Question 2 presupposes that the individual purchased the options at fair market value. Verify the amount paid and valuation materials, distinguishing this from trust-based arrangements in which a trust company acquires options for consideration and grants them to officers and employees.
• This primary source does not establish where the criteria for deciding whether the payment amount for the rights themselves is “fair market value” are prescribed. Article 84(3)(iii) excludes the preceding two items concerning share acquisition rights, and Circular 23–35 Common-7 concerns only that third item, so the original provisions must be checked.

Legal basis

• Companies Act, Article 236(1) (Terms of share acquisition rights) / Quoted wording: “When a stock company issues share acquisition rights, the following matters must form the terms of those rights.”
• Companies Act, Article 236(1)(ii) (Terms of share acquisition rights) / Quoted wording: “The value of property contributed upon exercise of the rights, or its calculation method.”
• Companies Act, Article 238(1)(iii) (Determination of subscription requirements) / Quoted wording: “In cases other than that prescribed in the preceding item, the payment amount for share acquisition rights offered for subscription (meaning the cash amount payable for each right; hereinafter the same in this Chapter), or its calculation method.”
• Companies Act, Article 238(3)(ii) (Determination of subscription requirements) / Quoted wording: “In the case prescribed in paragraph (1)(iii), where the payment amount in that item is particularly favorable to that person.”
• Order for Enforcement of the Income Tax Act, Article 84(3)(iii) (Value of restricted shares, etc.) / Quoted wording: “Rights to acquire shares where the amount payable for the shares is favorable (excluding rights listed in the preceding two items).”
• Act on Special Measures Concerning Taxation, Article 29-2(1) (Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.) / Quoted wording: “Share acquisition rights (limited to those prescribed by Cabinet Order; hereinafter ‘share acquisition rights’ in this paragraph).” “The economic benefit relating to acquisition of those shares shall be exempt from income tax.”
• Order for Enforcement of the Act on Special Measures Concerning Taxation, Article 19-3(1) (Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.) / Quoted wording: “The share acquisition rights prescribed by Cabinet Order in Article 29-2(1) of the Act shall be rights issued without requiring cash payment (including contribution of noncash assets) pursuant to a resolution under Article 238(2) of the Companies Act (Act No. 86 of 2005) (including determination of subscription requirements under delegation by a resolution under Article 239(1), and a board resolution under Article 240(1)).”
• Corporation Tax Act, Article 54-2(1) (Special provisions, etc. on the business year of expenses in consideration of share acquisition rights) / Only the provision's location is indicated; its text is not quoted.
• Order for Enforcement of the Corporation Tax Act, Article 111-3 (Scope, etc. of restricted share acquisition rights) / Only the provision's location is indicated; its text is not quoted.

Relevant administrative guidance, Q&A, and cases

• Income Tax Basic Circular 23–35 Common-7 (Where the amount payable for shares is favorable) / Quoted wording: “The phrase ‘where the amount payable for the shares is favorable’ in Article 84(3)(iii) of the Order means an amount below a value considered reasonable under generally accepted standards relative to the value of the issuer's shares under the circumstances on the date the payment amount is determined.” “Whether the amount is below a value considered reasonable under generally accepted standards shall be determined by whether the difference between the share value and the amount payable for the shares is approximately 10% or more of the share value.”
• National Tax Agency, “Taxation of Stock Options (Q&A),” last revised November 2024, Question 2 / Quoted wording: “Salary in kind received from an employer is subject to income tax as employment income upon receipt. However, if it consists of transfer-restricted stock options (nonqualified stock options), income cannot be realized by transferring them, so income is not recognized at grant; it is taxed as employment income (note) for the year of exercise (income tax Order, Article 84(3)).” “Because nonqualified stock options (paid type) are purchased at fair market value, no economic benefit arises and no tax consequences arise.” “The share transfer gain is 750: the share price at transfer (1,000) less the sum (250) of the option purchase price (50) and exercise price (200).”
• National Tax Agency, “Taxation of Stock Options (Q&A),” last revised November 2024, Question 6 / Quoted wording: “The stock options were granted free of charge to directors, etc. of the issuing company.”

Additional Authorities and Sources

• National Tax Agency, “Taxation of Stock Options (Q&A),” last revised November 2024, Questions 2 and 3
• Income Tax Act (e-Gov)
• Order for Enforcement of the Income Tax Act (e-Gov)

Sources checked September 7, 2026.