Statutory definition

The term “stock option” itself appears in neither the Companies Act nor the Income Tax Act or Corporation Tax Act. The Companies Act prescribes “share acquisition rights,” and Article 236 lists the terms a stock company must specify when issuing them.

“When a stock company issues share acquisition rights, the following matters must form the terms of those rights.”

• “The number of underlying shares (for a company issuing classes of shares, the class and number of each class), or the method for calculating that number.”
• “The value of property contributed upon exercise of the rights, or its calculation method.”
• ……
• “The period during which the rights may be exercised.”
• ……

What are commonly called stock options are “share acquisition rights” under Article 236 of the Companies Act: rights issued with terms specifying exercise price, exercise period, underlying share quantity and other matters. Article 236(3) separately addresses listed companies issuing such rights as directors' remuneration, requiring their terms to state that “cash payment ... upon exercise is not required.”

Overview

Where do “stock options” appear in the statutes?

The Companies Act calls them “share acquisition rights.” Article 236 prescribes their terms; Article 238 governs subscription requirements; Article 239 permits delegation of that determination to directors or, in companies with a board, the board; and Article 240 provides special rules for public companies.

Neither the Income Tax Act nor the Corporation Tax Act uses “stock option” as a statutory term. Article 29-2 of the Act on Special Measures Concerning Taxation provides an exemption subject to requirements under the heading “Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.” Even that heading does not use “stock option.” The provisions use the Companies Act and income tax concepts of “share acquisition rights” and “economic benefits.” Remember that “stock option” is a common name for Companies Act share acquisition rights, not an independent tax-law requirement.

Why does Article 361 matter for grants to directors?

Companies Act Article 361 lists matters concerning directors' remuneration, bonuses and other financial benefits received from the company for performing duties (“remuneration” in that Article) that must be determined by shareholders' meeting resolution or otherwise. Issuing rights as directors' remuneration follows Articles 238–240 for subscription terms, while Article 361's remuneration controls apply separately.

Where does income tax law address the economic benefit upon exercise?

Income Tax Act Article 36 provides that revenue received in “property other than money, rights or other economic benefits” is valued at “the value of that property, rights or benefits.” Economic benefits from acquiring shares through exercise of share acquisition rights fall within Article 36.

Income tax Order Article 84 specifies the calculation of that benefit. Where an issuer grants certain rights with transfer restrictions or other special conditions, the Article 36 value is the share value on the exercise date less prescribed amounts. Rights issued pursuant to Companies Act Article 238 resolutions on particularly favorable terms or at particularly favorable amounts, or as consideration for services or similar acts, are one category expressly covered by Article 84.

Is exercise income employment income or another category?

Income Tax Basic Circular 23–35 Common-6 classifies income from acquiring shares through exercise of rights under Order Article 84 according to the relationship between issuer and grantee. Rights granted “by reason of an employment contract or similar relationship” generate employment income. Other categories apply where no such relationship exists or the grant relates to the grantee's business. This article leaves application to the articles addressing each category.

Are there income tax exemptions or special issuer-side deduction rules?

Article 29-2 of the Act on Special Measures Concerning Taxation exempts economic benefits from acquiring shares through exercise of qualifying rights. For details of requirements, including eligible grantees, exercise periods and exercise-price limits, see What Are Tax-Qualified Stock Options? will handle.

For issuers, Corporation Tax Act Article 54-2 provides special rules on the business year of expenses paid in share acquisition rights. For deductibility and timing, see Tax deductibility for the issuing company of stock options will handle.

Points that require care in practice

• Companies Act procedures—which of Articles 238–240 was used and whether Article 361's remuneration controls apply—cannot be established without examining contracts and shareholders' and board meeting minutes. First check the actual resolution wording to identify which statutory requirements it corresponds to.
• Whether an “employment contract or similar relationship” under Circular 23–35 Common-6 exists cannot be determined from the circular alone. Grant circumstances and contractual relationships must be examined.
• Eligibility under Article 29-2 requires confirming that the contract for the rights satisfies its requirements. This must be checked contract by contract, so this article does not discuss the requirements themselves.

Legal basis

• Companies Act, Article 236(1)(i) (Terms of share acquisition rights) / Quoted wording: “The number of underlying shares (for a company issuing classes of shares, the class and number of each class), or the method for calculating that number.”
• 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 236(1)(iv) (Terms of share acquisition rights) / Quoted wording: “The period during which the rights may be exercised.”
• Companies Act, Article 236(3)(i) (Terms of share acquisition rights) / Quoted wording: “That the rights are issued as directors' remuneration or in exchange for payment using such remuneration, and that cash payment ... upon exercise is not required.”
• Companies Act, Article 238(2) (Determination of subscription requirements) / Quoted wording: “Subscription requirements must be determined by a shareholders' meeting resolution.”
• Companies Act, Article 239(1) (Delegation of determination of subscription requirements) / Quoted wording: “...A shareholders' meeting may by resolution delegate determination of subscription requirements to directors (or the board of directors for a company with a board).”
• Companies Act, Article 240(1) (Special rules for determining subscription requirements in public companies) / Quoted wording: “...In applying paragraph (2) of that Article to a public company, ‘shareholders' meeting’ shall be read as ‘board of directors.’”
• Companies Act, Article 361(1), introductory wording (Directors' remuneration) / Quoted wording: “The following matters concerning directors' remuneration, bonuses and other financial benefits received from a stock company as consideration for performing duties (hereinafter ‘remuneration’ in this Chapter) shall be determined by shareholders' meeting resolution if not specified in the articles of incorporation.”
• Income Tax Act, Article 36(1) (Revenue) / Quoted wording: “Unless otherwise provided, the amount to be treated as revenue or included in gross revenue in calculating each category of income for a year shall be the amount receivable in that year (where received in property other than money, rights or other economic benefits, the value of that property, rights or benefits).”
• Order for Enforcement of the Income Tax Act, Article 84(3), introductory wording (Value of restricted shares, etc.) / Quoted wording: “Where the issuing corporation grants rights listed in the following items that carry transfer restrictions or other special conditions (excluding grants in the capacity of shareholder, etc., limited to cases considered unlikely to harm other shareholders, etc. of the issuer), the value under Article 36(2) of the Act relating to those rights shall be the value of the shares acquired through exercise on the exercise date ... less the amount specified in the relevant item.”
• Order for Enforcement of the Income Tax Act, Article 84(3)(ii) (Value of restricted shares, etc.) / Quoted wording: “Share acquisition rights issued pursuant to a resolution under Article 238(2) of the Companies Act (Determination of subscription requirements) (including determination of subscription requirements under delegation by a resolution under Article 239(1) (Delegation of determination of subscription requirements), and a board resolution under Article 240(1) (Special provisions for determining subscription requirements in public companies)), limited to rights deemed granted on particularly favorable terms or for a particularly favorable amount to the subscriber, or deemed to constitute all or part of consideration for services or other acts.”
• Act on Special Measures Concerning Taxation, Article 29-2 (Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.) / Quoted wording: “Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.”
• Corporation Tax Act, Article 54-2 (Special provisions, etc. on the business year of expenses in consideration of share acquisition rights) / Quoted wording: “Special provisions, etc. on the business year of expenses in consideration of share acquisition rights.”

Relevant administrative guidance, Q&A, and cases

• Income Tax Basic Circular 23–35 Common-6 (Income classification where rights to acquire shares, etc. are granted) / Quoted wording: “Where rights are found to have been granted by reason of an employment contract or similar relationship between the issuing corporation and the grantee, the income shall be employment income.”