Stock Option Regulations and Taxation

1. Overview of Stock Option System
A stock option grants officers or employees the right to purchase shares of the company in the future at a predetermined price. Typically, this process involves three stages:
(1) Granting: The company enters into a stock option agreement with its officers or employees, specifying the grant conditions, eligibility criteria, vesting requirements, and exercise terms.
(2) Vesting: Upon satisfaction of the prescribed conditions, the grantee becomes entitled to exercise the option within a certain period.
(3) Exercising: At the grantee’s discretion, the stock option is exercised, and shares are acquired.
Stock options are commonly used as a form of compensation, incentive, or motivation for employees who have contributed or are expected to contribute to the company’s growth. Depending on the applicable laws, stock options are categorized into (i) general stock options governed by the Korean Commercial Act (“KCC”), and (ii) qualified stock options for venture companies governed by the Special Act on the Promotion of Venture Businesses (“Venture Business Act”).

2. General Stock Options vs. Venture Company Stock Options
General stock options are granted and exercised by ordinary corporations pursuant to the KCC, the company’s articles of incorporation, and relevant agreements (Articles 340-2 to 340-4 of the KCC).
Venture company stock options are granted and exercised by venture companies in accordance with the Venture Business Act, their articles of incorporation, and relevant agreements (Articles 16-3 to 16-6 of the Venture Business Act).

3. Vesting, Exercise, and Expiry
While general and venture stock options share similar structures, they differ in certain respects, including eligibility, methods of grant, limits on the number of options granted, exercise price, grant procedures, conditions for exercise, continuous service requirement, and the grounds for cancellation or expiration.
Venture stock options may be granted not only to officers and employees but also to outside experts. Moreover, exceptions may apply to the two-year continuous service requirement ordinarily imposed before exercising an option.

4. Taxation and Preferential Tax Treatment
The gain realized upon exercise of a stock option (defined as the difference between the market value of the shares at the time of exercise and the exercise price) is treated as earned income and subject to taxation.
If the shares are actively traded on a market, the transaction price may be recognized as the market value (Article 89 of the Enforcement Decree of the Corporate Tax Act). For venture companies whose shares are not actively traded, valuation is generally made through a supplementary valuation method (Article 63 of the Inheritance and Gift Tax Act). The issue price of shares in a simple paid-in capital increase does not constitute market value (National Tax Service rulings and guidance).
Venture company stock options may benefit from various tax incentives under the Restriction of Special Taxation Act, including special tax exemption (Article 16-2), special installment payment (Article 16-3), and special tax treatment upon transfer (Article 16-4).

5. Cases and Key Considerations
(a) Meeting the Service Requirement upon Auditor Appointment by Resolution
In a Supreme Court en banc decision (Decision 2016Da251215, March 23, 2017), the Court held that once a person is elected and accepts the appointment as a director or auditor at a shareholders’ meeting, the position is acquired regardless of whether a separate employment agreement with the representative director has been executed. Accordingly, if the shareholders’ meeting validly resolved to appoint the plaintiff as auditor, the plaintiff shall be deemed to have served the requisite two years to satisfy the stock option exercise condition.
(b) Exception to the Continuous Service Requirement
Under Article 16-3(6) of the Venture Business Act, unless otherwise provided by the relevant Ministerial Decree, stock options may be exercised only if the grantee has served as an officer or employee for at least two years from the date of the shareholders’ resolution granting the option.
However, Article 4-4(2) of the Enforcement Rules of the Venture Business Act provides an exception, requiring the venture company to allow the exercise of stock options within the exercise period if the grantee dies, retires upon reaching the mandatory retirement age, or retires or resigns for reasons not attributable to him or her.
In the case where a director is not reappointed at a shareholders’ meeting, the court has held that, in view of all circumstances, this does not necessarily constitute termination for reasons attributable to the individual. In precedents, the courts have interpreted “reasons attributable to the grantee” as those that, in light of social norms, make it unreasonable to expect the company to maintain the fiduciary relationship. Even if the grantee was involuntarily removed, the termination may still be deemed “attributable” if such reasons existed.
(c) Share Transfer Following Stock Option Exercise
For listed companies, following the exercise of stock options, share transfers must be effected through electronic registration under the Act on Electronic Registration of Stocks, Bonds, etc. (“Electronic Securities Act”). Direct issuance or delivery of share certificates by the company is not permitted (Supreme Court Decision 2020Da273403, July 25, 2024). As the Electronic Securities Act is relatively new, particular care should be exercised in legal claims involving the issuance or transfer of share certificates.
  Sojong Partners has extensive experience advising clients on the establishment and ongoing legal compliance of all types of entities in Korea. We have assisted numerous foreign corporations and individuals through every stage of the incorporation process, tailoring our services to address each client’s unique circumstances and legal requirements. For further information or to discuss your business plans in Korea, please contact us.