This is somewhat of a niche issue, but there has been increasing discussion about taxation on trust-type stock options (share acquisition rights). Many companies have adopted this type of stock options, as a means of executive or employee compensation, for instance, because they are subject to lower tax rates when the recipients exercise their rights to acquire shares. However, it is only now, after many years have passed, that the National Tax Agency (NTA) has raised a red flag, causing a great deal of confusion among some companies where these stock options have already been exercised to a considerable degree.

Stock options are a type of share subscription rights that allow the option holder to purchase shares of the issuing company at a predetermined price, and are often granted by companies to their executives and employees as a form of compensation. The stock options in question here are trust-type stock options. These stock options are devised by a private consulting firm, and differ from other types of stock options in that they are first transferred to a trust before being issued to recipients. This scheme is appealing to many companies not only because it allows them to designate the recipients, such as executives and employees based on their contribution, but also because it treats the income generated from the exercise of the stock option rights (and the subsequent sale of the shares acquired) as capital gains, as opposed to employment income, that are taxed at a lower rate. Many venture companies, regardless of whether they are listed or not, rushed to implement the scheme as a way to secure talented personnel and to motivate them. However, the NTA has pointed out that treating the income generated from the exercise of the stock options as capital gains is incorrect tax treatment. We learned about the trust-type stock options when we were considering to implement stock-based compensation, and we, too, decided to adopt them, because they seemed more convenient than other types of stock options. However, this issue on taxation emerged before long. Although we have not issued trust-type stock options, let alone seen the exercise of these stock options by our employees, there are companies that have already issued them, which have already been exercised and on which they have already paid taxes. For these companies, this situation can simply be exasperating.

When this issue on taxation of trust-type stock options came to light, I for a moment considered questioning the executive in charge, asking, “why didn’t you conduct more thorough research?” However, considering that over 800 companies have already implemented these stock options, including many that are thought of as the leaders of Japan’s future, and that a considerable time has passed since then, I realized it would be futile to blame the executive for simply taking the consulting firm’s word for it. I suspect that the majority of the companies that have implemented the scheme are as stunned as we are, facing a similar situation.

Now, what could have caused such unnecessary confusion? The aforementioned consulting firm claims to have made an inquiry to the NTA and received a response indicating it was appropriate to consider income from the stock options as capital gains, while the NTA denies giving such a response.

Well, that’s about it for the story. At this point, the truth isn’t clear. It might become evident with time, but I can’t even say for sure whether it needs to be clarified. If you live long enough, you see unexpected things happen, and sometimes you will even get caught in the middle of it. It is not impossible for those in power to disregard laws and regulations, and I don’t believe we should think this country is a perfect rule-of-law state, although nonetheless I much prefer living in this country than in an authoritarian state.

There is one unfortunate thing, though: the absence of a leader in this country who thinks for the benefit of all, who thinks of the optimal outcome for the whole. What the NTA claims seems quite reasonable, so I understand their urge to speak out about it, focused on doing their job properly. However, amid ongoing globalization and intensifying economic competition among developed countries, promoting industries that can compete in the global market is crucial for any country. And regarding the issue on the taxation of trust-type stock options, in addition to the NTA, the Ministry of Economy, Trade and Industry, the Ministry of Finance, auditing firms, and many others involved in work related to economic activity should have been aware of these developments. Although a considerable amount of time has passed since the start of the implementation of trust-type stock options, no leader has emerged who has put together points of discussion and advocated the nurturing of Japanese startups and venture companies for the good of the nation before such an issue arose. This means that while there were those who were focused on optimizing their share and position, putting their interest ahead of others, no one thought for the whole and came up with an optimal scenario for all parties involved. It is like an orchestra without a conductor, with violinists, cellists, flutists, clarinetists, trumpeters, trombonists, and timpanists each performing their part without considering overall harmony. For companies and in places of education, this lack of focus on cultivating leaders may be a disadvantage for our company.

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.