More than any other business, start-ups are expected to be the most seriously affected by Tuesday's Supreme Court ruling in favor of taxing profits on stock options as salary income.

Start-ups are active practitioners of the incentive method, in which employees are offered rights to buy shares in their company at a predetermined price to encourage such things as loyalty and hard work. It is estimated that one in every three listed Japanese firms offers stock options.

The court ruling, which is expected to influence another 100 lawsuits currently pending, means that taxes on profits from stock options will almost double. Such profits will be taxed as recurring income instead of occasional income, thereby eliminating any advantages for the holders.

The ruling will not affect firms such as Nissan Motor Co. and Softbank Corp., however, which have already changed their rules and treat the profits as salary income.

The Accounting Standards Board of Japan, meanwhile, says it will require companies to book stock options as expenses starting in fiscal 2006.

Firms that are heavily dependent on stock options are worried because the changes will noticeably trim their profits.

Cyber Agent Ltd., a listed online ad agency, is reviewing the stock option program it introduced in 2000.

The company says the program is intended to motivate its board members and employees, and save money by avoiding outright cash payouts.

An official at AnGes MG Inc., a listed bio-medical venture, also says it will be difficult to grant stock options if the accounting standards change.

According to Daiwa Institute of Research, the revised accounting standards would shave consolidated net profits at listed firms by 1.2 percent between fiscal 1998 and fiscal 2005.

The private think tank estimates at least 65 listed companies will see their net profits in fiscal 2004 drop by 10 percent or more.

At Trend Micro Inc., a developer of anti-computer virus software, the expenses for stock options stood at 1.3 billion yen in 2003, equivalent to 9 percent of its operating profit.

A Daiwa analyst says stock option expenses will surpass net profits at some venture firms.(IHT/Asahi: January 27,2005)