United States and Japan Sign New Income Tax Treaty: Includes Significant Benefits for Business

On November 6, 2003, the United States and Japan signed a new income tax treaty. The treaty, intended to reduce tax-related barriers to trade and investment between the United States and Japan, is a complete modernization of the 1971 United States-Japan tax treaty. As described in further detail below, key changes from the 1971 treaty include elimination of withholding tax on (i) royalties, (ii) certain dividends paid by subsidiaries to parent companies, and (iii) interest payments to banks, insurance companies and other financial institutions. The treaty will not become effective until ratified by the United States Senate and the Japanese Diet. Japan is considering using the treaty as a model for its future negotiation of tax treaties with other countries.

Key provisions of the new treaty include the following:

1. Royalties
2. Interest Dividends 
3. Branch Profits Tax
4. Flow-Through Entities
5. Transfer Pricing
6. Stock Options
7. Conduit Arrangements
8. Limitation on Benefits
9. Effective Dates

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