"Specified restricted stock" is a type of stock compensation also known as "restricted stock." It is a mechanism in which shares are granted in advance as consideration for the provision of services, and the transfer restrictions are lifted on the condition of continued employment or the achievement of performance targets, with the exercise of rights in between. What is a stock option? differs from. promises future delivery What is an RSU (Restricted Stock Unit) Differences from and similarities with it will be covered in a separate article.

Statutory definition

Where an individual has provided services to a corporation, and restricted stock meeting the following requirements (hereinafter referred to as "specified restricted stock" in this paragraph) is delivered to such individual as consideration for such provision of services (...) the value under Article 36, paragraph 2 (Amount of Revenue) of the Act relating to such specified restricted stock or succeeded restricted stock at the time of delivery shall be the value on the date on which the restriction on the transfer of such specified restricted stock or succeeded restricted stock (including the creation of security interests and other dispositions; the same shall apply in item (1) of the following paragraph) is lifted (or, in cases where such individual dies on or before such date, with respect to such specified restricted stock or succeeded restricted stock for which it is determined by the time of such individual's death that they do not fall under the grounds prescribed in item (2) of the following paragraph, the date of such individual's death).

Article 84 of the Enforcement Order of the Income Tax Act provides that the amount to be treated as revenue pertaining to these specified restricted shares shall be the value not at the time of delivery, but on the date when the restriction on transfer is lifted.

Overview

What is "restricted stock" and what is "specific" restricted stock

Article 84 of the Enforcement Order of the Income Tax Act stipulates the requirements for restricted stock as: "that restrictions are placed on transfer, and a period pertaining to such restrictions on transfer (referred to as the "transfer restriction period" in the following item) is established," and "that grounds (......) are established under which the corporation receiving the provision of services from the individual in the preceding paragraph or the corporation that issued the shares or delivered them to the individual in the same paragraph will acquire the shares without compensation." The condition of being "specified" applies when the shares fall under either "they are delivered to the individual in exchange for the fulfillment of a claim arising to the individual as consideration for the provision of such services," or "in addition to what is listed in the preceding item, the restricted stock is recognized as substantially being consideration for the provision of such services," and the structure does not require satisfying both.

Under the Companies Act, why can a listed company issue shares without the payment of money?

Article 202-2 of the Companies Act provides, as a special rule for when a stock company that issues shares listed on a financial instruments exchange prescribed in Article 2, Paragraph 16 of the Financial Instruments and Exchange Act solicits shares pursuant to provisions regarding the matters set forth in Article 361 of the Companies Act based on its articles of incorporation or a resolution of a shareholders meeting, that "it must stipulate that the issuance of shares or disposition of treasury shares pertaining to the solicitation is made as director remuneration, etc. (...), and that the payment of cash in exchange for the solicited shares or the provision of property under Article 199, Paragraph 1, Item (3) is not required" and "the day on which the solicited shares are allotted (hereinafter referred to as the 'allotment date' in this Section)." Correspondingly, Article 209 of the Companies Act provides that "Notwithstanding the provisions of paragraph (1), if there are provisions regarding the matters set forth in each item of Article 202-2, paragraph (1) pursuant to the latter part of that paragraph, a subscriber for solicited shares becomes the shareholder of the solicited shares it subscribed to on the allotment date," setting the time to become a shareholder as the allotment date.

When does the amount of the issuing company's expenses become deductible for tax purposes in which business year?

Article 54 of the Corporation Tax Act provides that when a domestic corporation receives the provision of services from an individual and specified restricted stock is delivered with respect to the amount of the expenses therefor, "the provisions of this Act shall apply on the assumption that the provision of such services was received on the date when it is ascertained that an amount to be included in the amount of revenue pertaining to employment income or other income specified by Cabinet Order prescribed in the Income Tax Act for such individual pursuant to the provisions of the Income Tax Act and other laws and ordinances relating to income tax, or an amount to be included in the gross revenue, arises with respect to the provision of such services by such individual (...)." When no taxable amount for employment income, etc. arises, it is provided that "......the amount of expenses resulting from the domestic corporation receiving the provision of such services or the amount of loss resulting from not being able to receive the provision of all or part of such services shall not be included in the amount of deductible expenses in the calculation of the amount of income for each business year of the domestic corporation." The amount of expenses shall be in accordance with Article 111-2 of the Order for Enforcement of the Corporation Tax Act.

How does this relate to the non-deductibility of executive compensation?

Article 34 of the Corporation Tax Act lists, as one of the types of remuneration paid for an officer's duties at a prescribed time that is permitted to be included in deductible expenses as falling under neither regular fixed-amount remuneration nor performance-linked remuneration, "remuneration paid based on a provision to the effect that a determined amount of money, a determined number of shares (...) or stock acquisition rights, or specified restricted stock prescribed in Article 54, paragraph (1) (Special Provisions on Business Year of Attribution of Expenses with Restricted Stock as Consideration) pertaining to a determined amount of monetary claims, or specified stock acquisition rights prescribed in ..., shall be delivered." Article 71-3 of the Corporation Tax Enforcement Order, which prescribes the method for calculating the amount of expenses for "determined-number remuneration," excludes remuneration by means of specified restricted stock by providing "except for remuneration by means of specified restricted stock or successor restricted stock prescribed in Article 54, paragraph (1) (Special Provisions on Business Year of Attribution of Expenses with Restricted Stock as Consideration) of the Act or ...," and the amount of such expenses is governed by Article 54 of the Corporation Tax Act and Article 111-2 of the Corporation Tax Enforcement Order.

How is the income category of an individual who has received delivery determined?

Article 23 to Article 35-5-2 of the Basic Circular on Income Tax determines the income classification when the transfer restrictions on specified restricted stock, etc., are lifted, depending on the relationship between the issuing corporation and the person who received them, etc. It states that "If it is recognized that the specified restricted stock, etc., was granted due to an employment contract or a similar relationship with the issuing corporation, it shall be classified as employment income. However, if it is recognized that the transfer restrictions on the specified restricted stock, etc., were lifted due to the retirement of the person who received the specified restricted stock, etc., it shall be classified as retirement income." Separately, provisions are also established for cases "where it is recognized that the specified restricted stock, etc., was granted in connection with business conducted by an individual."

Regarding specified restricted stock, etc., there are additional provisions in Articles 23 to 35-5-2 through 5-4 of the Income Tax Basic Directive.

Points that require care in practice

• Whether the granted restricted stock falls under "being substantially recognized as consideration for the provision of such services" (Article 54 of the Corporation Tax Act contains similar wording) is not determined by a list of criteria in the statutes; therefore, it is necessary to individually verify the circumstances and conditions of the grant.
• When the date on which the taxable amount of salary or other compensation is finalized depends on events such as retirement or death, it must be individually confirmed in light of the provisions of Article 84 of the Ordinance for Enforcement of the Income Tax Act.
• Please check the original text on the National Tax Agency website for the specific provisions of Basic Directive on Income Tax 23 to 35-5-3 and 5-4.

Legal basis

• Article 84, Paragraph 1 of the Order for Enforcement of the Income Tax Act (Value, etc., of Restricted Stock) / Quoted text: "Where an individual has provided services to a corporation and, as consideration for the provision of the services, restricted stock that falls under any of the following requirements (hereinafter referred to as 'specified restricted stock' in this paragraph) is delivered to the individual, the value under Article 36, Paragraph 2 (Amount of Revenue) of the Act pertaining to the specified restricted stock or succeeded restricted stock at the time of delivery (...) shall be the value on the date on which the restriction on the transfer of the specified restricted stock or succeeded restricted stock (including the creation of security interests and other dispositions; the same shall apply in item (i) of the following paragraph) is lifted (or, in cases where the individual dies on or before that date, with respect to the specified restricted stock or succeeded restricted stock for which it has been determined that it does not fall under the grounds prescribed in item (ii) of the following paragraph at the time of the individual's death, the date of the individual's death)." "It shall be delivered to the individual in exchange for the satisfaction of a claim arising for the individual as consideration for the provision of the services." "In addition to what is listed in the preceding item, the restricted stock shall be recognized as substantially being consideration for the provision of the services."
• Article 84, Paragraph 2 of the Order for Enforcement of the Income Tax Act (Value, etc., of Restricted Stock) / Quoted text: "Restrictions on transfer are in place, and a period pertaining to such restrictions on transfer (referred to as the "transfer restriction period" in the following item) is established." "Grounds are established under which the corporation receiving the provision of services from the individual referred to in the preceding paragraph, or the corporation that issued the shares or delivered them to the individual referred to in the same paragraph, will acquire the shares without compensation (limited to grounds based on the individual's work status, such as the individual referred to in the same paragraph who received the delivery of the shares not continuing to work for a predetermined period within the transfer restriction period, or the individual's work performance not being favorable, or grounds based on the status of business performance or other indicators of these corporations, such as the business performance of these corporations failing to reach a pre-determined standard)."
• Article 202-2, Paragraph 1 of the Companies Act (Special Provisions for Determination of Matters Pertaining to Solicitation Relating to Director Remuneration, etc.) / Cited wording: "A stock company that issues shares listed on a financial instruments exchange prescribed in Article 2, Paragraph 16 of the Financial Instruments Act is not required to provide for the matters set forth in Article 199, Paragraph 1, Item (ii) and Item (iv) when making a solicitation of persons to subscribe for shares to be issued or treasury shares to be disposed of by it in accordance with provisions concerning the matters listed in Article 361, Paragraph 1, Item (iii) pursuant to the articles of incorporation or a resolution of a shareholders meeting." "to the effect that shares pertaining to such solicitation are to be issued or treasury shares are to be disposed of as director remuneration, etc. (meaning remuneration, etc. prescribed in Article 361, Paragraph 1; the same applies in Article 236, Paragraph 3, Item (i)), and that neither the payment of money in exchange for the solicited shares nor the delivery of property under Article 199, Paragraph 1, Item (iii) is required" "the day on which solicited shares are allotted (hereinafter referred to as the 'allotment date' in this Section)"
• Article 209, Paragraph 4 of the Companies Act (Time of Becoming Shareholder, etc.) / Quoted text: "Notwithstanding the provisions of the first paragraph, if there is a provision on the matters listed in the items of Article 202-2, Paragraph 1 pursuant to the provisions of the second sentence of that paragraph, a subscriber for shares for subscription shall become a shareholder of the shares for subscription subscribed for by them on the allotment date."
• Article 54, Paragraph 1 of the Corporation Tax Act (Special Provisions for Fiscal Year of Attribution of Expenses with Restricted Stock as Consideration) / Cited text: "The provisions of this Act shall apply on the assumption that the services were received on the date on which it is determined that, for the said individual, an amount to be included in the revenue amount pertaining to employment income or other income specified by Cabinet Order prescribed in the Income Tax Act, etc. of the said individual pursuant to the provisions of the Income Tax Act and other laws and regulations relating to income tax, or an amount to be included in the gross revenue amount (referred to as 'taxable salary, etc. amount' in the following paragraph and paragraph 3), arises with respect to the provision of the said services."
• Article 54, Paragraph 2 of the Corporation Tax Act (Special Provisions on the Business Year of Attribution of Expenses Involving Restricted Stock as Consideration) / Quoted text: "In cases prescribed in the preceding paragraph, if no taxable amount of salaries, etc., arises for the individual referred to in that paragraph with respect to the provision of services referred to in that paragraph, the amount of expenses resulting from the domestic corporation receiving the provision of such services or the amount of loss resulting from the inability to receive the whole or part of such services shall not be included in the amount of deductible expenses in the calculation of the amount of income for each business year of the said domestic corporation."
• Article 111-2, Paragraph 1 of the Order for Enforcement of the Corporation Tax Act (Scope of Restricted Stock, etc.) / Quoted text: "Restrictions on transfer (including the creation of security interests and other dispositions) are in place, and a period pertaining to such restrictions on transfer (referred to as the "transfer restriction period" in the following item) is established." "Events are provided under which a domestic corporation receiving the provision of services from the individual referred to in Article 54, Paragraph 1 of the Act, or the corporation that issued the shares or delivered them to the individual referred to in the same paragraph, will acquire the shares without consideration (limited to events based on the work status of the individual, such as the individual referred to in the same paragraph who has received the delivery of the shares failing to continue working for a predetermined period within the transfer restriction period, or the work performance of the individual not being favorable, or events based on the status of business performance or other indicators of these corporations, such as the business performance of these corporations failing to reach a predetermined standard)."
• Article 34, Paragraph 1, Item 2 of the Corporation Tax Act (Non-Deductibility of Officers' Compensation) / Quoted wording: "compensation that is paid based on a provision to the effect that, for the officer's duties, money in a determined amount, a determined number of shares (including equity investments; hereinafter the same shall apply in this paragraph and paragraph 5) or share options, or specified restricted shares prescribed in Article 54, Paragraph 1 (Special Provisions for Business Years for Inclusion in Expenses of Expenses Involving Restricted Shares as Consideration) pertaining to monetary claims in a determined amount or specified share options prescribed in Article 54-2, Paragraph 1 (Special Provisions for Business Years for Inclusion in Expenses of Expenses Involving Share Options as Consideration, etc.) shall be delivered at a prescribed time, and which does not fall under either regular fixed-amount compensation or performance-linked compensation"
• Article 71-3, Paragraph 1 of Japan's Order for Enforcement of the Corporation Tax Act (Amount of Expenses, etc. Related to Remuneration Paid Based on Provisions to Deliver a Determinate Number of Shares) / Cited text: "excluding remuneration by means of specified restricted stock or succeeding restricted stock prescribed in Article 54, Paragraph 1 of the Act (Special Provisions for Business Year of Attribution of Expenses with Restricted Stock as Consideration) or specified share acquisition rights or succeeding share acquisition rights prescribed in Article 54-2, Paragraph 1 of the Act (Special Provisions, etc. for Business Year of Attribution of Expenses with Share Acquisition Rights as Consideration)"

Relevant administrative guidance, Q&A, and cases

• Income Tax Basic Directive 23 to 35-5-2 (Income classification when restrictions on the transfer of specified restricted stock, etc., are lifted) / Quoted wording: "If it is recognized that the specified restricted stock, etc., was granted resulting from an employment contract or a similar relationship with the granting corporation, it shall be classified as employment income. However, if it is recognized that the transfer restrictions on the specified restricted stock, etc., were lifted resulting from the retirement of the person to whom the specified restricted stock, etc., was granted, it shall be classified as retirement income." "If it is recognized that the specified restricted stock, etc., was granted in relation to business conducted by an individual"