Tax treaty update - Protocol to treaty with Japan is signed 

Read text of the Protocol [PDF 40 KB] and text of the exchange of notes [PDF 95 KB]

According to a Treasury Department release, the new Protocol amends the existing tax treaty (2003) to bring that agreement into closer conformity with the current tax treaty policies of both the United States and Japan.

Overview of provisions

The new Protocol includes:

• Rules for exclusive residence-country taxation of (i.e., a zero (0%) rate of withholding tax on) interest
• An expanded category of direct dividends potentially eligible for a zero rate of withholding tax (i.e., “at least 50%” instead of “more than 50%” and a reduced required holding period of six months)
• Amendments to existing treaty rules governing the taxation of capital gains in a manner that would permit the United States to fully apply the Foreign Investment in Real Property Tax Act (FIRPTA)
• Rules for resolution, through mandatory binding arbitration, of certain cases that the tax authorities of the United States and Japan have been unable to resolve after a reasonable period of time
• Provisions to enable the competent authorities to assist each other in the collection of taxes
• An exchange of information provision to allow the competent authorities to facilitate the administration of each country’s tax laws

Ratification, effective date provisions

The Protocol will enter into force after both countries satisfy their respective internal ratification procedures, and its provisions will have effect as follows:

• Withholding taxes - for amounts paid or credited on or after the first day of the third month next following the date on which the new treaty enters into force
• Other taxes - for tax periods beginning on or after the first day of January next following the date on which the new treaty enters into force

Special rules apply to the application of Article 25 (Mutual Agreement Procedure) of the new Protocol to cases under consideration by the competent authorities of both the United States and Japan on the date on which the Protocol enters into force. The exchange of information provisions take effect on the date on which the Protocol enters into force.