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Economy

Japan looks to allow wider use of stock options by startups

Outside experts such as researchers and engineers can save on income tax

People work at a shared office in Tokyo. The Japanese government is pushing a series of programs to help nurture startups. (Photo by Nobuyoshi Shioda)

TOKYO -- Japanese startups soon will be permitted to use stock options for paying outside experts who contribute to new business, under the government's latest proposal to encourage innovation.

While executives and other employees often receive pay in the form of stock options, eligibility will be expanded to researchers from universities and other institutions as well as freelance programmers, engineers, lawyers and doctors.

The startup company must be less than 10 years old to qualify, and obtain government approval related to a plan that uses outside experts for new business development. Related legislation is to be submitted to Japan's ordinary Diet session that opens Jan. 28.

Stock options let recipients buy company shares at a predetermined price. If the shares rise above that price, then the difference becomes a profit. Many companies that went public in 2017 used stock options in compensation.

Taxes on stock options are deferred until the shares are sold, at which time a 20% rate is applied. As high earners in Japan pay up to 45% in income taxes, stock options might let outside experts lower their tax bill. Startups also would save on cash by using stock for compensation, counting on their potential for growth.

The country's ruling parties look to raise the cap on corporate tax deductions to 40% from the current 25% for research and development spending at startups. The change is part of their fiscal 2019 tax reform proposal compiled in December.

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