The Tokyo High Court on Wednesday overturned a lower court decision and ruled that tax authorities were acting legally when they determined that profit from stock options constituted salary income.
At issue was whether the profits were salary income or one-time income, which carries a lower tax rate. Since 1998, the National Tax Agency has been treating profit from exercising stock options as salary income. Conflicting rulings have been handed down at the district court level in similar cases.
A male employee of Microsoft Co., the Japanese affiliate of Microsoft Corp. of the United States, had taken issue with the fact that tax officials determined that the roughly 49 million yen he had gained as a result of exercising his stock-option rights between 1996 and 1998 constituted salary income.
He was taxed roughly 7.9 million yen more than if it had been seen as temporary income.
Presiding Judge Tomonori Sagara said Wednesday that the nature of income is decided by "not who paid it, but what it was paid out for."
He said it was salary income because the stock options were given to the employee by the parent company in exchange for his provision of labor.
In November 2002, the Tokyo District Court deemed in the first such ruling on the case that any profit determined by investors' decisions cannot be considered an exchange for labor, and as such was one-time income. It nullified the tax levied on the man's profits.
But last month, the Yokohama District Court rejected a lawsuit filed by former employees of four foreign-affiliated firms seeking nullification of taxes levied on the profits they gained by exercising their stock-option rights.
Dozens of similar suits have been filed nationwide.