The U.S.-Japan Income Tax Treaty
Japan has long been one of the United States’ largest trading partners. Japan is also one of the United States’ longest-standing tax treaty partners. The first U.S.-Japan income tax treaty was concluded in 1954. Updated treaties were signed in 1971 and 2003, and a protocol in 2013 further modernized the treaty. The U.S.-Japan income tax treaty largely follows the model tax convention published by the Organisation for Economic Co-operation and Development (OECD), of which both countries are members.
The U.S.-Japan income tax treaty helps reduce the incidence of double taxation and encourages the cross-border movement of people and goods. In general, the tax treaty allocates or restricts taxing rights between the two countries so that a resident of either the United States or Japan does not pay tax in both countries with respect to the same income (or pays reduced rates of tax in one of the countries).
For example, dividends paid by a company which is a resident of the United States to a resident of Japan may generally be taxed in both Japan and the U.S., but the rate of tax imposed by the United States with respect to such dividends is limited to either 5% or 10% (or, in some circumstances, such tax may be eliminated). In the case of interest and royalties paid by a resident of one of the countries, only the country in which the recipient of the interest or royalty payment resides may tax such payments. Similarly, capital gains derived by a resident of the United States or Japan from the sale of property other than real estate are generally taxable only by the country in which the seller of the property resides. Gains from the sale of real estate and certain real estate holding companies, however, remain taxable in both countries under the tax treaty.
The tax treaty also provides for tie-breaker rules so that the same person is not considered a resident of both countries and provides a limited safe harbor for wages and salaries paid to residents of one country who perform employment services in the other country. Other provisions relate to the taxation of diplomats, athletes, and branches or “permanent establishments” of multinational businesses, among other special situations. Where disputes regarding the taxation of cross-border activities arise, notwithstanding the provisions of the treaty, the treaty provides a dispute resolution mechanism whereby the U.S. and Japanese governments can come to a mutual agreement to reduce or eliminate the additional taxation.
Recent U.S.-Japan income tax treaty documents and Treasury Department technical explanations are available at treasury.gov.
Nicholas A. Gard