U.S. income tax treaty with Japan

The convention and its 2013 protocol

The IRS lists the 1971 convention, the 2003 convention with its technical explanation, and a 2013 protocol with its technical explanation.^[1] The 2003 convention replaced the 1971 treaty. The 2013 protocol amends it, mainly by exempting interest at source, shortening the holding test for the 0 percent dividend rate and adding mandatory arbitration for cases the competent authorities cannot settle.^[5][6]

The 2003 convention has 31 articles. Article 10 covers dividends, Article 11 interest, Article 12 royalties, Article 22 limitation on benefits, Article 23 relief from double taxation, Article 24 non-discrimination, Article 25 the mutual agreement procedure, Article 26 exchange of information and Article 27 assistance in collection.^[8]

Dividends, interest and royalties

Article 10 lets the payer's country tax dividends at up to 5 percent of the gross amount when the beneficial owner is a company holding at least 10 percent of the voting stock, and at up to 10 percent in other cases. Dividends are not taxed at source at all when the beneficial owner is a company that has held more than 50 percent of the voting stock for six months (as amended in 2013) and meets one of the limitation on benefits tests, or a qualifying pension fund.^[8][5] The 2003 convention's 0 percent rate originally required more than 50 percent for 12 months.^[8]

Article 11, as replaced in 2013, makes interest taxable only in the country of the beneficial owner. The exception is interest determined by reference to the debtor's receipts, profits or cash flow, which the source country can tax at up to 10 percent, and mortgage securitization income, which is taxed under domestic law.^[5] Before the protocol the limit on ordinary interest was 10 percent.^[8]

Article 12 gives the residence country the sole right to tax royalties.^[8] Each of these articles steps aside when the income is effectively connected with a permanent establishment in the source country, and the business profits article applies instead.^[8]

Residence and dual residence

Article 4 defines residence by each country's tax rules. A U.S. citizen or green card holder is treated as a U.S. resident for treaty purposes only if he or she is not a resident of Japan under the article, has a substantial presence, permanent home or habitual abode in the United States, and is not treated as resident of a third country under that country's treaty with the United States.^[8]

An individual resident in both countries is assigned to the country where a permanent home is available. If there is a home in both, the country with closer personal and economic relations decides. Otherwise habitual abode decides, then nationality, and if the individual is a national of both or neither the competent authorities settle the question by mutual agreement.^[8]

Saving clause and U.S. citizens

Article 1(4) provides that the convention does not affect a country's taxation of its residents and, for the United States, its citizens, except as paragraph 5 provides. Paragraph 5 preserves, among others, the relief from double taxation in Article 23, non-discrimination, the mutual agreement procedure and diplomatic privileges. A former U.S. citizen or long-term resident can be taxed under U.S. law for 10 years after losing that status if tax avoidance was one of the principal purposes.^[8] A U.S. citizen resident in Japan therefore remains taxable by the United States on worldwide income, with relief coming mainly through the foreign tax credit.^[8]

Related reading

Related treaty pages include U.S. income tax treaty with Australia, U.S. income tax treaty with Italy and U.S. income tax treaty with France.

Questions and answers

Related resources

Related glossary terms

• Tax residence: Tax residence describes a person's status in a country for tax purposes. Treaty texts address how it affects income items and applicable treaty requirements.
• Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties. The IRS explains the tables' scope and limits.

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• U.S. income tax treaty with France: The U.S. income tax convention with France is amended by two protocols, and the 2009 Protocol changed the dividend and royalty rules for qualifying holders.

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