The Journal The Authority on Global Business in Japan

International assignees from the United States who are working for branch offices or subsidiaries in Japan may have been granted stock options (SOs) or restricted stock units (RSUs) by the US headquarters or parent company.

The benefits arising when SOs are exercised or RSUs are vested are taxable in general as receipt of employment income. Here is how the benefits are taxed in Japan.

At first any individual is subject to tax liability of income tax in accordance with the following residential statuses.

RESIDENTS
Any individual who has a domicile (center of living) in Japan or who resides in Japan continuously for one year or more is classified as a resident.

Among residents, any non-Japanese national who has had a domicile or a residence in Japan for an aggregate period of five years or less within the past 10 years is classified as a non-permanent resident. All other non-Japanese nationals (and Japanese nationals) are classified as permanent residents.

NON-RESIDENTS
Any individual other than the residents mentioned above is classified as a non-resident.

In the event that SOs are exercised or RSUs are vested while the assignee is working in Japan, he or she will be taxed as a resident. If SOs are exercised or RSUs are vested after the assignee has left Japan, he or she will be taxed as a non-resident. Non-residents are taxed on their domestic (Japan) source income at 20.42 percent. In both cases, they need to file an income tax return that includes the benefits and pay taxes.

Apportionment of benefits between domestic (Japan) source income and foreign source income is calculated as follows:

SOs
Benefits = fair market value of stock when exercised – grant price

Domestic source income, etc. = the benefits × (number of days working in Japan from the date granted to the date exercised) ÷ (number of days from the date granted to the date exercised)

RSUs
Benefits = fair value of stock when vested

Domestic source income, etc. = the benefits × (number of days working in Japan from the date granted to the date exercised) ÷ (number of days from the date granted to the date exercised)

Takehiko Hara is a director at Grant Thornton Japan’s Global Mobility Service, providing tax solutions to global mobile employees, global business and high-net-worth individuals with overseas assets. Hara joined Grant Thornton Japan in 2018 after having 35 years of experience at the Tokyo Regional Taxation Bureau, Tokyo Regional Tax Tribunal, National Tax College, and National Tax Agency. Hara specializes in international taxation for Japanese and non-Japanese nationals.