Statutory definition

“An heir of those directors, etc. (limited to those prescribed by Cabinet Order; hereinafter referred to in this paragraph, the following paragraph and paragraph (6) as a ‘rights-succeeding heir’).” (Act on Special Measures Concerning Taxation, Article 29-2)

Tax-qualified stock options (What Are Tax-Qualified Stock Options?): when an eligible director or other grantee dies, the statute calls an heir entitled to exercise the share acquisition rights a “rights-succeeding heir.” The Article itself does not specify who qualifies; it delegates that question to Cabinet Order.

Overview

Who is a “rights-succeeding heir”?

Article 29-2 of the Act on Special Measures Concerning Taxation treats only heirs of directors, etc. “prescribed by Cabinet Order” as rights-succeeding heirs. Article 19-3 of its Enforcement Order specifies who these are.

“The heirs prescribed by Cabinet Order in Article 29-2(1) of the Act shall be heirs of directors, etc. prescribed in that paragraph (hereinafter referred to as ‘directors, etc.’ in this paragraph, paragraph (7)(ii)(a) and paragraph (27)) who, where those directors, etc. die during the period in which they may exercise share acquisition rights (meaning those prescribed in paragraph (1) of that Article; hereinafter the same in this Article), become entitled to exercise those rights under the grant resolution relating to those rights.” (Order for Enforcement of the Act on Special Measures Concerning Taxation, Article 19-3)

A rights-succeeding heir is an heir entitled under the grant resolution to exercise share acquisition rights when a director or other grantee dies during the exercise period. Article 29-2 treats this heir as a “right holder” alongside directors, etc. and specified service providers.

How are persons acquiring shares by inheritance or bequest classified?

Article 29-2 of the Act on Special Measures Concerning Taxation also addresses further succession by inheritance or bequest to shares acquired under tax-qualified treatment.

“Where, for any of the following reasons, all or part of shares acquired under the main clause of paragraph (1) and held by the individual who received that treatment (hereinafter referred to in this and the following paragraph as a ‘person receiving the special treatment’), or similar shares prescribed by Cabinet Order (... hereinafter referred to in this Article as ‘specified shares’), are returned or transferred (where an individual who acquired specified shares (... hereinafter referred to in this and the following paragraph as ‘specified shares of directors, etc.’) from a person receiving the special treatment by inheritance (excluding qualified acceptance) or bequest (...) (hereinafter referred to in this paragraph as a ‘successor receiving the special treatment’) ...” (Act on Special Measures Concerning Taxation, Article 29-2)

Here, the statute calls the person who acquired shares under tax-qualified treatment a “person receiving the special treatment,” and an individual acquiring those shares (“specified shares of directors, etc.”) by inheritance or bequest a “successor receiving the special treatment.” The subsequent taxation framework also relates to Non-residents, departure, and stock options and must be checked separately.

Are the share acquisition rights themselves inherited property?

The discussion of rights-succeeding heirs concerns eligibility under Article 29-2 of the Act on Special Measures Concerning Taxation. Separately, whether rights held by the deceased director or other grantee are inherited property subject to inheritance tax, and how they are valued, must be checked under the Inheritance Tax Act and the Property Valuation Basic Circular.

How is income classified when an heir exercises the rights?

For share acquisitions that do not meet tax-qualified requirements, Income Tax Basic Circular 23–35 Common-6 provides:

“Where the 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.” (Income Tax Basic Circular 23–35 Common-6)

The circular includes the following note:

“(Note) For example, note that the relationship of ‘directors, etc.’ prescribed in Article 29-2(1) of the Act on Special Measures Concerning Taxation ((Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.)) constitutes an employment contract or similar relationship.” (Income Tax Basic Circular 23–35 Common-6)

The note expressly refers to “directors, etc.,” not rights-succeeding heirs. Article 29-2 expressly includes such heirs among right holders, but within its exemption framework. Where a rights-succeeding heir exercises nonqualified share acquisition rights (Taxation of non-qualified stock options), income classification depends on the wording of this circular and how the relationship between the deceased and issuing corporation is viewed.

Can transfer or exercise of share acquisition rights be restricted?

Article 236 of the Companies Act lists matters that must form the terms of share acquisition rights when issued.

“When a stock company issues share acquisition rights, the following matters must form the terms of those rights.” (Companies Act, Article 236)

One listed matter is whether company approval is required for acquisition by transfer.

“If acquisition of those share acquisition rights by transfer requires approval of the stock company, that fact.” (Companies Act, Article 236)

Item (vi) concerns whether company approval is required for acquisition by transfer. It does not determine whether acquisition by inheritance (universal succession) is permitted.

The court's published summary reads as follows. The rights in this case were granted by a U.S. corporation and were not share acquisition rights under the Companies Act.

“During the grantee's lifetime, only the grantee could exercise the rights, and the rights could not be assigned or transferred.” (Supreme Court, Third Petty Bench, judgment of January 25, 2005)

This is a finding about the terms of the particular stock option plan, not a rule applicable to all share acquisition rights. The case itself concerned income classification—employment or occasional income (Stock option lawsuit (employment income or miscellaneous income / temporary income))—not whether inheritance was permissible. Whether particular rights can be inherited requires checking the contract and grant resolution defining their terms.

Points that require care in practice

• Whether an heir qualifies as an “heir prescribed by Cabinet Order” under Article 19-3 of the Order for Enforcement of the Act on Special Measures Concerning Taxation must be checked against the grant resolution and contract.
• Whether share acquisition rights are subject to inheritance tax and how they are valued requires checking the Inheritance Tax Act and the Property Valuation Basic Circular.
• Income classification where the heir is not a rights-succeeding heir or the rights are nonqualified may vary according to the circular's wording and how the relationship between the deceased and issuer is viewed. Individual examination is required.

Legal basis

• Act on Special Measures Concerning Taxation, Article 29-2(1), main clause (Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.) / Quoted wording: “An heir of those directors, etc. (limited to those prescribed by Cabinet Order; hereinafter referred to in this paragraph, the following paragraph and paragraph (6) as a ‘rights-succeeding heir’).”
• Order for Enforcement of the Act on Special Measures Concerning Taxation, Article 19-3(5) (Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.) / Quoted wording: “The heirs prescribed by Cabinet Order in Article 29-2(1) of the Act shall be heirs of directors, etc. prescribed in that paragraph (hereinafter referred to as ‘directors, etc.’ in this paragraph, paragraph (7)(ii)(a) and paragraph (27)) who, where those directors, etc. die during the period in which they may exercise share acquisition rights (meaning those prescribed in paragraph (1) of that Article; hereinafter the same in this Article), become entitled to exercise those rights under the grant resolution relating to those rights.”
• Act on Special Measures Concerning Taxation, Article 29-2(4) (Same heading) / Quoted wording: “Where, for any of the following reasons, all or part of shares acquired under the main clause of paragraph (1) and held by the individual who received that treatment (hereinafter referred to in this and the following paragraph as a ‘person receiving the special treatment’), or similar shares prescribed by Cabinet Order (... hereinafter referred to in this Article as ‘specified shares’), are returned or transferred (where an individual who acquired specified shares (... hereinafter referred to in this and the following paragraph as ‘specified shares of directors, etc.’) from a person receiving the special treatment by inheritance (excluding qualified acceptance) or bequest (...) (hereinafter referred to in this paragraph as a ‘successor receiving the special treatment’) ...”
• Companies Act, Article 236(1), introductory wording (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)(vi) (Same heading) / Quoted wording: “If acquisition of those share acquisition rights by transfer requires approval of the stock company, that fact.”

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 the rights are found to have been granted by reason of an employment contract or similar relationship between the issuing corporation and the grantee” and “shall be employment income.”
• Income Tax Basic Circular 23–35 Common-6 (Same heading) / Quoted wording: “(Note) For example, note that the relationship of ‘directors, etc.’ prescribed in Article 29-2(1) of the Act on Special Measures Concerning Taxation ((Exemption, etc. for economic benefits relating to acquisition of shares through exercise of share acquisition rights received by specified directors, etc.)) constitutes an employment contract or similar relationship.”
• Supreme Court, Third Petty Bench, judgment of January 25, 2005 (2004 (Gyo-Hi) No. 141) / Quoted summary: “During the grantee's lifetime, only the grantee could exercise the rights, and the rights could not be assigned or transferred.”