Statutory definition

“If shares relating to the specified stock acquisition rights are acquired through exercise of those stock acquisition rights (limited to rights whose agreement stipulates the following requirements, or requirements in items (i) through (vi) where the rights are granted to the director or other eligible person; hereinafter in this Article referred to as ‘specified stock acquisition rights’) in accordance with that agreement, income tax is not imposed on the economic benefit arising from the acquisition of those shares.” (Article 29-2 of the Act on Special Measures Concerning Taxation)

Tax-qualified stock options are stock acquisition rights that meet the requirements of Article 29-2 of the Act on Special Measures Concerning Taxation (the “specified stock acquisition rights” under that Article). When they are exercised in accordance with the agreement and shares are acquired, the economic benefit is not subject to income tax at exercise.

Overview

Who may receive qualifying stock acquisition rights?

Article 29-2 of the Act on Special Measures Concerning Taxation describes eligible persons as follows:

“... an individual who is a director, executive officer, or employee of the corporation (excluding ... a ‘major shareholder’ and ... a ‘specially related person of a major shareholder’; hereinafter in this paragraph, the following paragraph, and paragraph (6) referred to as a ‘director or other eligible person’), or an heir of that director or other eligible person (... hereinafter in this paragraph, the following paragraph, and paragraph (6) referred to as an ‘heir succeeding to the rights’), or ... a ‘specified service provider,’ who is granted the stock acquisition rights under an agreement concluded, pursuant to the grant resolution, between the stock company and the director or other eligible person or specified service provider.” (Article 29-2 of the Act on Special Measures Concerning Taxation)

The agreement is concluded with a director or other eligible person or a specified service provider. An heir succeeding to the rights is a person who may inherit and exercise them. Major shareholders and their specially related persons are excluded.

How is the annual exercise price limit assessed?

The proviso to Article 29-2 of the Act on Special Measures Concerning Taxation states:

“... if the total of the amount payable on that exercise in the year (...) (where, on the date of the resolution granting the specified stock acquisition rights, the stock company that concluded the agreement for those rights has existed for less than five years since incorporation, the amount calculated by dividing the exercise price by two; where that company has existed for at least five but less than twenty years since incorporation and meets other requirements prescribed by Ministry of Finance Order, the amount calculated by dividing the exercise price by three; ...) and the exercise prices for those and other specified stock acquisition rights already exercised by the holder in that year would exceed 12 million yen, this provision does not apply to the economic benefit from acquiring shares through the exercise of the specified stock acquisition rights that causes the total to exceed 12 million yen.” (Proviso to Article 29-2 of the Act on Special Measures Concerning Taxation)

This is where the 2024 tax reform made a change. The amendment changed the calculation used to compare the exercise price with the limit, replacing it with an amount calculated by dividing the exercise price by two or by three; it did not change the stated amount of the limit. The requirements that distinguish division by two from division by three, including that the company has existed for at least five but less than twenty years and meets other requirements prescribed by Ministry of Finance Order, are set out in Article 11-3 of the Regulation for Enforcement of the Act on Special Measures Concerning Taxation.

“The requirements prescribed by Ministry of Finance Order under the proviso to Article 29-2(1) of the Act are as follows.”

• (i) “The stock company referred to in the proviso to Article 29-2(1) of the Act ... has existed for at least five but less than twenty years since incorporation.”
• (ii) “The stock company referred to in the proviso to Article 29-2(1) of the Act falls within any of the following categories of company.”
• (a) “On the date of the grant resolution under the proviso to Article 29-2(1) of the Act, a company other than one issuing shares listed ... or registered ... .”
• (b) “On the date of the grant resolution under the proviso to Article 29-2(1) of the Act, a company issuing listed shares (...) for which less than five years have elapsed since the shares were first listed ... .”
• (c) “On the date of the grant resolution under the proviso to Article 29-2(1) of the Act, a company issuing shares registered as an over-the-counter traded issue (...) for which less than five years have elapsed since the initial registration ... .” (Article 11-3 of the Regulation for Enforcement of the Act on Special Measures Concerning Taxation)

Both conditions must therefore be met: the company must satisfy the age requirement and be either unlisted or recently listed or registered for over-the-counter trading.

“The amount calculated by dividing by two or three is determined for the aggregate exercise price in each exercise, with any fraction of a yen arising after the division rounded up to the next whole yen.” (National Tax Agency, Taxation of Stock Options (Q&A), Question 6 (Reference))

What requirements apply to the exercise period and price?

The following additional requirements apply:

The departure notification requirement applies only to specified service providers (see the parenthetical qualification cited above). The method for determining the value per share is discussed in Stock Option Exercise Prices and Share Valuation.

How must shares acquired through exercise be managed?

The acquired shares must be managed by one of the following methods:

“Shares acquired through exercise of the stock acquisition rights must satisfy one of the following requirements.”

• (a) “Under an arrangement concluded in advance between the stock company and a financial instruments business operator or financial institution prescribed by Cabinet Order (...), the shares must ... be entered or recorded in the transfer account book, or placed in custody or a management trust ... .”
• (b) “Under an arrangement concluded in advance between the stock company and the person granted the stock acquisition rights under the agreement concerning shares delivered on exercise (limited to shares subject to transfer restrictions; the same applies in (b)) ... (limited to an arrangement requiring the company to maintain a ledger ... and other requirements prescribed by Cabinet Order), the shares must be managed by the company immediately after acquisition ... .” (Article 29-2 of the Act on Special Measures Concerning Taxation)

Item (a) provides for custody or similar arrangements through a financial instruments business operator or comparable institution. Item (b) provides for management by the issuing company itself and was added in the 2024 reform. The following transitional measure applies to existing agreements:

“A transitional measure permits the amended requirements above to apply to agreements concluded before April 1, 2024, if the agreements are amended by December 31, 2024.” (National Tax Agency, Taxation of Stock Options (Q&A), Question 6 (Note))

Is tax imposed at exercise or at transfer?

The exemption at exercise is described above under “Statutory definition,” but its application is subject to the following procedural requirements:

“The main clause of the preceding paragraph applies only if, when the holder exercises specified stock acquisition rights, the following requirements are met (or, if the rights being exercised were granted to a director or other eligible person, the requirements in items (i) and (iii)).” (Article 29-2 of the Act on Special Measures Concerning Taxation)

Question 6 of the National Tax Agency’s Taxation of Stock Options (Q&A) explains:

“If shares acquired through exercise are sold, the gain on the transfer of shares is subject to tax.” (National Tax Agency, Taxation of Stock Options (Q&A), Question 6)

Points that require care in practice

• Applying the “period since incorporation” requirement calls for checking both Article 11-3 of the Regulation for Enforcement of the Act on Special Measures Concerning Taxation and the issuing company’s incorporation date in primary records.
• Whether an agreement made before the amendment was changed to meet the requirements by the transitional deadline must be checked against the agreement itself.

Legal basis

• Act on Special Measures Concerning Taxation, Article 29-2(1), main clause (Exemption, etc. from income tax on economic benefits arising from shares acquired through exercise of stock acquisition rights granted to certain directors and others). Quoted text: “If shares relating to the specified stock acquisition rights are acquired through exercise of those stock acquisition rights (limited to rights whose agreement stipulates the following requirements, or requirements in items (i) through (vi) where the rights are granted to the director or other eligible person; hereinafter in this Article referred to as ‘specified stock acquisition rights’) in accordance with that agreement, income tax is not imposed on the economic benefit arising from the acquisition of those shares.”
• Act on Special Measures Concerning Taxation, Article 29-2(1), main clause (same heading). Quoted text: “... an individual who is a director, executive officer, or employee of the corporation (excluding an individual who, on the date of the grant resolution, held the number of shares of the stock company prescribed by Cabinet Order (hereinafter in this paragraph and the following paragraph referred to as a ‘major shareholder’) and ... a ‘specially related person of a major shareholder’; hereinafter in this paragraph, the following paragraph, and paragraph (6) referred to as a ‘director or other eligible person’), or an heir of that director or other eligible person (limited to an heir prescribed by Cabinet Order; hereinafter in this paragraph, the following paragraph, and paragraph (6) referred to as an ‘heir succeeding to the rights’), or an individual other than a director, executive officer, or employee of the stock company or the corporation (excluding major shareholders and specially related persons of major shareholders; ... hereinafter in this Article referred to as a ‘specified service provider’), who is granted the stock acquisition rights under an agreement concluded, pursuant to the grant resolution, between the stock company and the director or other eligible person or specified service provider.”
• Act on Special Measures Concerning Taxation, proviso to Article 29-2(1) (same heading). Quoted text: “... if the total of the amount payable on that exercise in the year (...) (where, on the date of the resolution granting the specified stock acquisition rights, the stock company that concluded the agreement for those rights has existed for less than five years since incorporation, the amount calculated by dividing the exercise price by two; where that company has existed for at least five but less than twenty years since incorporation and meets other requirements prescribed by Ministry of Finance Order, the amount calculated by dividing the exercise price by three; ...) and the exercise prices for those and other specified stock acquisition rights already exercised by the holder in that year would exceed 12 million yen, this provision does not apply to the economic benefit from acquiring shares through the exercise of the specified stock acquisition rights that causes the total to exceed 12 million yen.”
• Act on Special Measures Concerning Taxation, Article 29-2(2) (no heading). Quoted text: “The main clause of the preceding paragraph applies only if, when the holder exercises specified stock acquisition rights, the following requirements are met (or, if the rights being exercised were granted to a director or other eligible person, the requirements in items (i) and (iii)).”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(i) (no heading). Quoted text: “The stock acquisition rights must be exercised between the date two years after the resolution to grant the rights and the date ten years after that resolution (or, where on the date of the grant resolution the stock company that concluded the agreement for those rights has existed for less than five years since incorporation and meets other requirements prescribed by Ministry of Finance Order, the date fifteen years after the grant resolution).”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(ii) (no heading). Quoted text: “The aggregate annual exercise price for exercise of the stock acquisition rights must not exceed 12 million yen.”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(iii) (no heading). Quoted text: “The exercise price per share for exercise of the stock acquisition rights must be at least an amount equivalent to the value per share of the stock of the stock company that concluded the agreement for those rights at the time the agreement was concluded.”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(iv) (no heading). Quoted text: “Transfer of the stock acquisition rights must be prohibited.”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(v) (no heading). Quoted text: “The delivery of shares on exercise of the stock acquisition rights must be made without contravening the matters prescribed in Article 238(1) of the Companies Act for which the grant resolution for that delivery was made.”
• Act on Special Measures Concerning Taxation, opening words of Article 29-2(1)(vi) (no heading). Quoted text: “Shares acquired through exercise of the stock acquisition rights must satisfy one of the following requirements.”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(vi)(a) (no heading). Quoted text: “In accordance with an arrangement (...) concluded in advance between the stock company concerned and a financial instruments business operator or financial institution prescribed by Cabinet Order (hereinafter in this Article referred to as a ‘financial instruments business operator, etc.’) concerning shares of the company delivered on exercise of stock acquisition rights, and as prescribed by Cabinet Order, immediately after acquisition the shares must, through the stock company, be entered or recorded in the transfer account book of the financial instruments business operator, etc., or entrusted for custody or placed in a management trust at its business office or office (referred to as a ‘business office, etc.’ in paragraph (4)).”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(vi)(b) (no heading). Quoted text: “In accordance with an arrangement (...) concluded in advance between the stock company concerned and the person granted the stock acquisition rights under the agreement concerning shares of the company delivered on exercise (limited to shares subject to transfer restrictions; the same applies in (b)) (limited to an arrangement requiring the company to maintain a ledger for shares delivered on exercise; to record, by holder, acquisitions and other changes in those shares so as to manage them separately from other shares of the same issue; and to meet other requirements prescribed by Cabinet Order), and as prescribed by Cabinet Order, the shares must be managed by the stock company immediately after acquisition.”
• Act on Special Measures Concerning Taxation, Article 29-2(1)(vii) (no heading). Quoted text: “A person granted the stock acquisition rights under the agreement must, if departing from Japan (...) between the date the agreement was concluded and the date the rights are exercised, notify the stock company that concluded the agreement for those rights of that fact by the time of departure.”
• Regulation for Enforcement of the Act on Special Measures Concerning Taxation, opening words of Article 11-3(1) (Exemption, etc. from income tax on economic benefits arising from shares acquired through exercise of stock acquisition rights granted to certain directors and others). Quoted text: “The requirements prescribed by Ministry of Finance Order under the proviso to Article 29-2(1) of the Act are as follows.”
• Regulation for Enforcement of the Act on Special Measures Concerning Taxation, Article 11-3(1)(i) (same heading). Quoted text: “The stock company referred to in the proviso to Article 29-2(1) of the Act has existed for at least five but less than twenty years since incorporation as of the date of the grant resolution under that proviso (meaning the grant resolution prescribed in that paragraph; the same applies hereinafter in this Article).”
• Regulation for Enforcement of the Act on Special Measures Concerning Taxation, opening words of Article 11-3(1)(ii) (same heading). Quoted text: “The stock company referred to in the proviso to Article 29-2(1) of the Act falls within any of the following categories of company.”
• Regulation for Enforcement of the Act on Special Measures Concerning Taxation, Article 11-3(1)(ii)(a) (same heading). Quoted text: “On the date of the grant resolution under the proviso to Article 29-2(1) of the Act, a company other than one issuing shares listed on a financial instruments exchange prescribed in Article 2(16) of the Financial Instruments and Exchange Act (...) or shares registered as an over-the-counter traded issue (...).”
• Regulation for Enforcement of the Act on Special Measures Concerning Taxation, Article 11-3(1)(ii)(b) (same heading). Quoted text: “On the date of the grant resolution under the proviso to Article 29-2(1) of the Act, a company issuing shares listed on a financial instruments exchange (...) for which less than five years have elapsed since the date those shares were first listed on a financial instruments exchange following a filing with the Prime Minister under Article 121 of the Financial Instruments and Exchange Act (...).”
• Regulation for Enforcement of the Act on Special Measures Concerning Taxation, Article 11-3(1)(ii)(c) (same heading). Quoted text: “On the date of the grant resolution under the proviso to Article 29-2(1) of the Act, a company issuing shares registered as an over-the-counter traded issue (referred to as an ‘over-the-counter registered company’ in paragraph (3)(i)(c) and paragraph (16)(viii)) for which less than five years have elapsed since the date the shares were first registered as an over-the-counter traded issue under the rules of an authorized financial instruments firms association.”

Relevant administrative guidance, Q&A, and cases

• National Tax Agency, Taxation of Stock Options (Q&A), last revised November 2024, Question 6 (Reference). Quoted text: “The amount calculated by dividing by two or three is determined for the aggregate exercise price in each exercise, with any fraction of a yen arising after the division rounded up to the next whole yen.”
• National Tax Agency, Taxation of Stock Options (Q&A), last revised November 2024, Question 6 (Note). Quoted text: “A transitional measure permits the amended requirements above to apply to agreements concluded before April 1, 2024, if the agreements are amended by December 31, 2024.”
• National Tax Agency, Taxation of Stock Options (Q&A), last revised November 2024, Question 6. Quoted text: “If shares acquired through exercise are sold, the gain on the transfer of shares is subject to tax.”