Japan taxes stock options in two fundamentally different ways depending on whether they qualify under Article 29-2 of the Sozei Tokubetsu Sochi Ho (the Act on Special Measures Concerning Taxation). The difference between these two paths is not a small one. Non-qualified options are taxed as ordinary income at the time of exercise, at marginal income tax rates that can exceed 55 percent when national and local taxes are combined. Qualified options (zeisei-tekikaku) are taxed only when the underlying shares are sold, and only as capital gains, at approximately 20 percent.
That gap, between 55 percent at exercise and 20 percent at sale, represents real money. On an exercise gain of 10 million yen, the difference is 3.5 million yen. On 50 million yen, it is 17.5 million yen. For employees at a startup that achieves a successful outcome, the difference between working for a company that got this right and one that did not can exceed an entire year's salary.
Most founders who have thought about this at all know about zeisei-tekikaku. The problem is not awareness. The problem is in the details of what actually disqualifies a grant.
Exercise price below fair market value
This is the single most common disqualification. The statutory requirement is clear: the exercise price must equal or exceed the fair market value of the underlying share at the date of grant. For an unlisted company, the fair market value is not a market price; it is a calculated value using methods defined by the National Tax Agency (Kokuzeicho).
Many founders set the exercise price based on gut feel, or based on the most recent financing round price, without going through a formal calculation. If the calculated fair market value is higher than the price they set, the grant does not qualify, regardless of what the agreement says. The option document can say "these are zeisei-tekikaku qualified options" in its title, and that language will not override the statutory requirement that the price floor be met.
The calculation methods for unlisted company FMV are described in the NTA guidance and involve either a net asset approach, an income approach, or sometimes a comparable company method, depending on the company's financial profile. We cover the FMV calculation in detail in a separate article. The key point here is that the calculation needs to be done, documented, and the result reflected in the exercise price. "We think our shares are worth about 1,000 yen" is not a calculation.
Missing or incorrect board authorization
Under the Kaisha-ho, issuing stock acquisition rights (shinkabu yoyakuken, the legal form that options take in Japan) requires a board resolution that meets specific requirements. For a kabushiki kaisha with certain capital structures, shareholder approval may also be required. The board resolution must specify the terms of the grant including the exercise price, exercise period, and the number of rights being issued.
For zeisei-tekikaku treatment, the resolution must also include language that specifically designates the grants as being intended to qualify under Article 29-2. General-purpose board resolution templates sometimes omit this. A resolution that says "we hereby issue stock acquisition rights to the following employees on the following terms" without the qualified-option designation is not sufficient to establish qualified status.
Founders who use a law firm to draft their first option agreements sometimes receive a template that has this language, and then continue issuing subsequent grants using that template without realizing they need to update the board authorization for each new grant round. Each tranche of grants requires its own authorization. A single blanket authorization from year one does not cover grants issued in year two.
The annual exercise cap and tax treatment
Article 29-2 imposes an annual cap on the exercise value that can qualify for favorable treatment: 12 million yen per holder per calendar year. This cap is calculated based on the exercise price, not the market value at the time of exercise. An employee who exercises options with a total exercise price value exceeding 12 million yen in a single calendar year will have the excess treated as ordinary income, even if all the underlying grants were properly structured as qualified options.
This matters most for employees with large grants who are in a position to exercise all at once, for example at or after a TSE listing. If the total exercise price value is 30 million yen and the employee exercises everything in December, 18 million yen of that exercise will be taxed as ordinary income. Splitting the exercise across calendar years, some in December and some in January, is a straightforward way to remain within the cap, but it requires planning and awareness.
Companies that have not modeled each holder's exercise capacity under the annual cap cannot give their employees accurate guidance at the time of grant or at the time of exercise. This is another area where a spreadsheet-based approach to option tracking falls short: the annual cap calculation per holder is dynamic, changing as the company issues new grants and as holders make partial exercises.
The custodial deposit requirement
For shares issued upon exercise of a qualified option to receive capital gains treatment at disposal, those shares must be deposited with a qualified securities company under a designated custody agreement. This requirement often catches companies by surprise, because it is a post-exercise operational requirement, not something that is visible at grant time.
The company must have a custodial contract in place with a securities company that is willing to hold the shares, and the holder must deposit the shares within a specified time frame after exercise. If the shares are not deposited, or if they are deposited late, the capital gains treatment at the time of eventual sale may be denied, and the gains may be treated as ordinary income instead.
This is one of the areas where we see confusion most often. An employee exercises their options cleanly, within the annual cap, with a properly structured grant, and then fails to take the custodial deposit step because no one told them it was required. The tax outcome at sale is then the ordinary income rate rather than capital gains, not because the grant was defective, but because the post-exercise procedure was not followed.
What does not disqualify a grant
It is worth being clear about what does not affect qualification. The size of the grant does not matter, as long as the annual exercise cap is managed. The seniority or employment status of the recipient does not disqualify the grant; non-director employees, part-time employees, and in some cases certain contractors can receive qualified options. The industry the company operates in does not affect qualification. And the company's profitability or stage does not affect qualification; the zeisei-tekikaku rules apply equally to pre-revenue startups and profitable growth-stage companies.
We are not saying any of the compliance requirements are unimportant. We are saying that once you understand which requirements actually apply to your situation and which do not, the compliance burden is more focused than it can appear from a first read of the statute.
