Stock-option: In or Out of Japan - 2M Yen question

[Toto123]

Anyone has had a similiar experience they want to share on stock-options?

I just received a friendly letter from the Tokyo Tax man asking about my stock-options for years 2006 & 2007 (she happens to be a Tax woman and speaks good dawn good english!) I had not filled a tax return for this anectodic income, so how did she find out?? I am meeting her tomorrow to settle the matter...

I came to Japan in 2003, so I understand during those years I was still considered as non-permanent resident (less than 5 years).
Those stock-options are from US headquarter company, net proceeds about 1M Yen in each year (total 2M yen).

1. Would stock-options held by US company qualify as "income outside Japan" under non-permanent resident (less than 5 years residence). Do I need to declare and pay tax for this special income assuming that stock-options proceeds are paid:
- if the money was wired to a foreign bank (USA, Europe), is it considered "paid abroad" and not-taxable under non-permanent residency?
- if the money was wire-transfered to my Japan bank, is it considered "redeemed in Japan" and taxable under non-permanent residency?


2. Worst case scenario, I think my tax band is 30%. Is there any deduction (such as 500K yen for capital gain)? Any penalty for late submission?

3. Under which category fall the income from stock-options "same day sale" (misc income, capital gain, other..). Which form to fill in tax return (A, B, Other separate Taxation form?)


That will be greatly appreciated.. I learned a lot from this forum, I hope this story will help others too :-)

[Majestic]

Hello Toto 123

You might have already checked out the National Tax Agency’s page at http://www.nta.go.jp/taxanswer/english/12001.htm , but in there is the operative phrase, “INCOME FROM SOURCES IN JAPAN" is stipulated in the Japanese Income Tax Law. For example, salaries, wages or other compensation for personal services performed in Japan are treated as "INCOME FROM SOURCES IN JAPAN" whether they are paid in Japan or abroad”. This of course is the long way of them saying, “show me the money”.

So, with that bit of bad news out of the way;

1.A. No. Unfortunately, as above, income from exercising of stock options would be considered taxable income from sources in Japan.
1.B. Yes in both situations. Whether the money was wired or not, where it was wired, etc… is irrelevant.
2.A. No deduction. I think stock options are generally considered to be earned income (i.e. compensation for labor performed) both in the US and Japan. There are specific rules about this. The difference between the strike price and the fair-market-value is income, not a capital gain. If you held onto the stock rather than exercising it in a same-day transaction, any appreciation from the day you exercised until the day you sold would be considered capital gain.
2.B. You might be up for a slight penalty. You will probably also be up for a retroactive increase in your Inhabitant’s Tax for those years as well.
3. Hmmm, now I’m stretching for an answer, but I believe it is considered ordinary income, and hence gets added to your salary and the total is input at “カ” on the B form.

Also, any US taxes you paid on this income can be used to offset a Japanese tax liability on this same income (assuming you are a US taxpayer).

I’m not a tax expert – so before you do anything drastic talk to a tax expert.

M.

[Toto123]

Hi Majestic,

Thanks! I am afraid you may be right, and all the reserach I have done on this topic in the last 24H seems to lead to the same but painful answer, that stock option proceeds (while conduction business in Japan) are indeed taxable income. Including a free call to the TOKYO TAX COUNSELING IN ENGLISH (03.3821.9070), which I did. You can ask any question and post back to this Forum!

Having said that, I came across an internet article posted by a CPTA guy below, and he mentions about 12M yen threshold for taxation. How do you interpret this and would this apply to us gaijin?


"Further, when a Japanese corporation introduces the stock option system and the plan is qualified for Japanese tax law, and the exercised amount is JPY 12 million per annum, there is no taxation at the exercise of the stock option right. It is taxed at the sales of the stocks as capital gains on the whole amount of profits （（sales price − strike price）× number of shares sold（Special Taxation Measures Law 29 ─ 2）."
http://www.tax.tohmatsu.co.jp/public...4/20040514.pdf

I'll let you know after my interview with Tokyo Tax...

[Majestic]

I'm not an expert on this, but I think the Tokyo High Court has already determined that proceeds from exercised stock options are ordinary income.

I think Tohmatsu was trying to argue that if stock options were merely exercised and not sold (i.e. you exercised your right to buy the stocks for the agreed strike price, but then held on to those stocks) then the exercise itself would not be a taxable event. When you eventually sold the stocks, you would be taxed at "occasional income" rates on the difference between strike price and selling price.

But it seems this argument failed to impress the Tokyo High Court on a couple of occasions.

The link below has some info (in Japanese) on the high-court ruling. Sorry I couldn't bring you any joy on this issue.

http://www.mjs.co.jp/kenkyukai/pdf/08091101.pdf

[Toto123]

All right, I am going to report my interview with Tax woman: I kind of knew what to expect from information collected on this forum (thanks Majestic!).

After some brief introduction, and confirmation of my tax status, I showed my stock-option reports. I did not want to hide anything, after all she knew more about me than I would ever imagine. Adding this to my slary income, she rapidly calculated the due-tax (difference between what I HAD paid and what I SHOULD have paid) for each year. It came between 20% to 30% of the net proceeds depending on my taxable income and tax year.

But then she went on and added the PENALTIES.
- penalty: 15% of tax amount to be paid
- delinquent tax: 4.7% per annum imposed on due amoun, starting from the satutory date for tax payment (March of each year)

Since she corrected both years 2006 and 2007, that means I would pay the penalty+delinquent tax on each year.
I argued this was my first time in Japan, I was non-permanent resident, I did not have the money and would need to borrow, so I asked IF she would be kind enough to drop the penalty... She hesitated, asked me to wait for a while... I felt she was ready to do something for me!! But then she came back... Sorry she said, you have to pay the penalty (orders from the boss!!).
I guess I had the option to ask to go and speak to the boss.. But those guys are not known for their sympathy, and I was not in the position anyhow to negotiate so I surrendered.

Well it was NOT a good experience, but overall was impressed by customer-service at Tax office. My interview was all in english (I guess not too many staff speak english). She filled my tax papers for me, and also the pay slip. I asked one month delay before payment due date, which she accepted. I even offered to pay in kind....but they only accept bank or post office transfers!

My advise to you: don't wait to declare and pay your tax, because one way or another they can find YOU and the more you wait the more expensive it becomes! I have no idea they could get stock reports directly from US authorities (even though I am not US or Japanese citizen)...But they found me - it was a good lesson on Japan Tax Law. Believe me, if you intend to live in Japan even for a few years, you'd better be aware of the tax laws (in english for foreigners)!!

http://www.nta.go.jp/foreign_language/index.htm