Protocol to Japan-U.S. Tax Treaty: Japan and the United States Sign a Protocol Amending the Existing Japan-U.S. Income Tax Treaty

Sullivan & Cromwell LLP - January 31, 2013

On January 24, 2013, Japan and the United States signed a protocol, together with an exchange of notes related thereto, (the “Protocol”), amending the income tax treaty signed by the two countries in 2003 (as modified by a protocol and exchange of notes signed at the same time, the “Existing Treaty”).

The Protocol makes a number of significant changes to the Existing Treaty, including the following:

  • Interest. Eliminates withholding tax on interest, subject to certain limitations;
  • Dividends. Expands the category of dividends eligible for zero rate of withholding tax;
  • Capital Gains. Amends the provisions of the Existing Treaty governing the taxation of capital gains in a manner that permits the U.S. to fully apply the Foreign Investment in Real Property Tax Act (“FIRPTA”);
  • Arbitration. Provides for resolution through mandatory binding arbitration of certain cases that the competent authorities have been unable to resolve after a reasonable period of time, consistent with a number of recent U.S. tax treaties; and
  • Exchange of Information and Mutual Assistance. Provides for mutual assistance in the collection of taxes and also provides for the full exchange of taxpayer information between the tax authorities of each country.

These changes will bring the Existing Treaty into closer conformity with the current tax treaty policies of both the U.S. and Japan.

The Protocol will enter into force upon ratification by both countries and apply (i) in respect of withholding taxes, to payments made on or after the first day of the third month next following the date on which the Protocol enters into force, and (ii) in respect of other taxes, for taxable periods beginning on or after the January 1 following the date on which the Protocol enters into force. The mandatory arbitration provision will apply to cases that are under consideration by the competent authorities as of the date on which the Protocol enters into force or that come under consideration after such date. The exchange of information and mutual assistance provisions will have effect from the date of entry into force of the Protocol.