Hello, this is NS from Sayu CPA Office.

Equity compensation plans vary in structure and tax treatment depending on the system, and many employees feel uncertain when filing their tax returns.
Questions such as “I received RSUs after joining a foreign-affiliated company” or “My company offers an ESPP—how will it be taxed?” have become increasingly common, particularly among those working at foreign-owned companies.
In this article, we will review three representative equity compensation plans—Stock Option, RSU (Restricted Stock Unit), and ESPP (Employee Stock Purchase Plan)—and summarize their features and key tax considerations.

1.Three Major Types of Equity Compensation Plans

(1) Stock Option
Stock options give employees the right to purchase company stock in the future at a predetermined price (exercise price). Employees benefit if the stock price rises, which is why stock options are often used to boost motivation and align employee performance with company growth. They are widely used, particularly by venture firms and foreign-affiliated companies.

Basic Structure of Stock Option
①Grant – The company grants employees the right to acquire shares at a future date.
②Exercise – Once certain conditions (e.g., years of service, performance goals) are met, the employee may exercise the right and purchase shares at the set price.
③Sale – Employees may sell the acquired shares on the market and realize a profit.

There are two main types of stock options in Japan: tax-qualified stock option (with preferential tax treatment) and non-qualified stock option (without tax benefits).

〇Tax-qualified stock option
・No income tax at exercise.
・Tax is imposed only when shares are sold, as capital gains.
・Capital Gain = Sale Price – Acquisition Price

〇Non-qualified stock option
・At exercise, the difference between the fair market value and the exercise price is taxed as employment income.
・Upon sale, the difference between the sale price and acquisition price is taxed as capital gains.
・This results in two stages of taxation: once at exercise (employment income) and once at sale (capital gains).

It is important to confirm in advance whether your stock options are qualified or non-qualified, as the timing and calculation of tax differ.

(2) RSU (Restricted Stock Unit)
RSU is grant of company stock that employees receive once certain conditions (such as tenure or performance) are met. RSU is widely adopted by U.S.-based multinational companies, and many employees in Japan encounter them if they work for such firms or their Japanese subsidiaries.

Basic Structure of RSU
①Grant – Employees are granted RSUs, which are subject to restrictions until conditions are met.
②Vesting – When service or performance conditions are satisfied, the restrictions are lifted, and shares are delivered.
③Sale – Shares can then be sold in the market, generating potential profit.

Taxation occurs at two stages:
・At vesting: the fair market value of the stock received is taxed as employment income.
・At sale: the difference between the sale price and the value at vesting is taxed as capital gains.

Thus, RSU trigger employment income taxation at vesting and capital gains taxation at sale.

(3) ESPP (Employee Stock Purchase Plan)
ESPP allow employees to purchase company shares at a discount (typically 10–15%). Purchases are often funded through payroll deductions, making it easy for employees to participate. ESPP is common among U.S. companies and available to employees of their Japanese subsidiaries as well.

Basic Structure of ESPP
①Grant – Employees are granted the right to purchase shares at a discount.
②Purchase – Employees exercise this right and buy shares at below-market prices.
③Sale – Shares can later be sold on the market.

Taxation occurs at two stages:
・At purchase: the discount (market price – purchase price) is treated as employment income.
・At sale: the difference between the sale price and the market value at purchase is taxed as capital gains.
(Note: The acquisition cost for capital gains purposes is the market value at the time of purchase, not the discounted purchase price.)

Thus, ESPP involve employment income taxation at purchase and capital gains taxation at sale.

2.Tax Return Considerations

While stock options, RSU, and ESPP all provide financial benefits, they also make the tax return process more complex. In particular, if multiple grants, exercises, or sales occur, employees must calculate employment income and capital gains for each transaction.

At our office, we provide tax advisory and filing support for employees of foreign-affiliated companies, including those with overseas brokerage accounts. If you have any concerns or questions regarding the taxation of equity compensation, please feel free to contact us.