U.S.-Japan tax treaty: withholding rates on interest, dividends, royalties and services

Status and notes

• IRS Table 1 still lists 10% on interest. The 2019 protocol exempts most interest from withholding for amounts paid on or after November 1, 2019, and lowered the ownership needed for the exempt direct-dividend rate from more than 50% to at least 50%, held for six months. Read Articles 10 and 11 as amended before applying the table figures.

What sets the U.S.-Japan treaty apart

The U.S.-Japan treaty was rewritten in 2003 and amended by a 2013 protocol that took effect for withholding in late 2019. Interest and royalties are now generally exempt at source, though the IRS tables still show 10% for interest. Dividends are 10%, 5% or 0%, and the 0% parent test is looser than in most treaties: at least 50% for six months. The treaty is also unusually precise about hybrid entities, denies benefits to tokumei kumiai arrangements and dual-resident entities, and since 2013 has no article for visiting teachers.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 2005. Protocols in effect from: Jan. 1, 2020. IRS country code JA.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-Japan treaty as a payer

Documents and dates

The convention and its protocol were signed in Washington on November 6, 2003, replacing the 1971 treaty; the IRS tables list January 1, 2005 as the general effective date. A protocol signed on January 24, 2013 entered into force on August 30, 2019. Its withholding changes apply to amounts paid or credited on or after the first day of the third month after entry into force, so from November 1, 2019; its other changes from January 1, 2020 (2013 Protocol Art. XV). A withholding agent that over-withheld after the effective date leaves the Japanese owner to claim a refund under Code section 1464.

Hybrid entities, tokumei kumiai and dual residents

Article 4(6) gives five rules for income derived through an entity, keyed to where it is organized and how Japan treats it:

• an entity organized in Japan that Japan treats as transparent: its Japanese-resident owners claim, whatever the U.S. classification;
• an entity organized in Japan that Japan taxes as an entity: the entity claims, if it is a resident;
• a third-country entity Japan treats as transparent: its Japanese-resident owners claim;
• a third-country entity Japan treats as opaque: no benefits;
• a U.S. entity Japan treats as opaque: no benefits on its U.S. income.

The 2003 protocol lets the U.S. treat a tokumei kumiai (a Japanese silent partnership contract) as not resident and deny benefits to the arrangement and its participants. The technical explanation's example: U.S. interest paid to a tokumei kumiai gets no treaty benefits even if the operator and investors are Japanese residents. Since 2013, a company or other non-individual resident in both countries gets no benefits at all (Art. 4(4)), though a dividend it pays to a Japanese shareholder still gets the treaty rate. A Japanese resident taxed only on remittances gets relief only on the amount remitted (Art. 4(5)).

Limitation on benefits

Article 22 qualifies individuals, governments and the two central banks, companies whose principal class of shares is listed on a recognized exchange and regularly traded (at least 6% of the average outstanding shares in the prior year), subsidiaries at least 50% owned by five or fewer such companies, tax-exempt organizations, pension funds with more than half their beneficiaries resident in either country, and companies passing an ownership and base erosion test. Other companies may claim on income connected with an active trade or business in Japan, or ask the competent authority. There is no derivative benefits test. For withholding, the ownership tests must be met for the part of the year before the payment and, unless the payment is on the last day of the year, for the whole of the preceding year (Art. 22(3)).

Interest and royalties

Before the 2013 protocol, interest was taxed at 10% unless the lender was a government, bank, insurer, securities dealer, qualifying finance company or pension fund, or the interest arose on a credit sale. Now interest beneficially owned by a Japanese resident is taxable only in Japan (Art. 11(1)), except:

• contingent interest, determined by reference to the debtor's or a related person's receipts, sales, income, profits, cash flow, asset values or dividends, which may be taxed at up to 10% (for U.S. interest, only where it is not portfolio interest);
• REMIC excess inclusions, taxed under domestic law;
• the part of related-party interest above an arm's-length amount, which may be taxed at up to 5%, a cap other treaties do not have;
• back-to-back loans, where a non-qualifying third-country person holds an equivalent claim.

Royalties are taxable only in Japan (Art. 12(1)), with the same 5% cap on any excess over arm's length and a conduit rule for royalties passed on to a non-qualifying third-country person. The definition covers copyrights including films and broadcast tapes, patents, trademarks, designs, secret formulas and know-how.

Dividends

The 5% rate needs a company owning, directly or indirectly, at least 10% of the voting stock on the date entitlement is fixed. Since 2013 the 0% rate needs a company owning at least 50% of the voting stock, directly or through residents of either country, for the six months ending on that date (before, more than 50% for 12 months), and either: it passes the public company test; it passes both the ownership and base erosion test and the active business test; or the competent authority grants it (Art. 10(3)(a)). Pension funds get 0% on dividends not derived from a business. RIC and REIT dividends never get 5% or the parent 0% rate; RIC dividends get 10% (0% for pension funds), and REIT dividends qualify only for a holder of 10% or less who is an individual or pension fund, a holder of 5% or less of a listed class, or a holder of 10% or less of a diversified REIT (Art. 10(4)). A resident is not the beneficial owner of preferred stock dividends in a back-to-back arrangement with a non-qualifying person (Art. 10(11)).

Services and fees

There is no independent personal services article: "business" includes professional services, and Article 7 covers them, so a Japanese contractor's fees are exempt unless attributable to a U.S. permanent establishment. Construction and installation projects count after more than 12 months. The 2003 protocol makes guarantee fees, securities lending fees and commitment fees taxable only in the recipient's country absent a permanent establishment.

Employees are exempt only if present no more than 183 days in any 12-month period beginning or ending in the year, paid by a non-U.S. employer and not borne by a U.S. permanent establishment (Art. 14(2)). Stock option gains are apportioned by days worked in each country between grant and exercise. Directors' fees for serving on the board of a U.S. company may be taxed by the U.S. without limit; pay a director receives in another role, such as employee or consultant, is not covered by that rule (Art. 15). Performers and athletes are taxable once gross receipts for the year, including reimbursed expenses, exceed $10,000, and then on the whole amount (Art. 16(1)).

Pensions and Social Security

Pensions, including lump sums, and Social Security, including tier 1 Railroad Retirement, are taxable only in the country of residence (Art. 17(1)). A U.S. payer does not withhold on them for a Japanese resident who claims the treaty. Alimony and support are taxable only in the payer's country, and not at all if the payer gets no deduction (Art. 17(3)).

Teachers and students

The 2013 protocol deleted Article 20, which exempted visiting teachers and researchers for two years. A person already entitled to it when the protocol entered into force keeps it until it would have expired. Students and business apprentices are exempt on payments from outside the U.S. for maintenance, education or training; apprentices for one year only, and a payment routed abroad by a U.S. person does not count (Art. 19).

Other income and arbitration

Other income is taxable only in Japan (Art. 21), subject to the same 5% cap on non-arm's-length excess and a conduit rule. Since the 2013 protocol, mutual agreement cases the competent authorities cannot resolve go to mandatory "final offer" arbitration, generally two years after the case begins.

Where payers get it wrong

• Still withholding 10% on interest. Since November 1, 2019 the general rate is 0%, even though IRS Table 1 has not caught up. Over-withholding is refunded under section 1464.
• Granting 0% on a dividend on ownership alone. The 50% holding for six months must be combined with the public company test, the ownership plus active business tests, or a competent-authority grant.
• Accepting a claim from a tokumei kumiai or a dual-resident company. The U.S. may deny the first, and the second gets no benefits.
• Exempting a performer up to $10,000 of a larger fee. Above $10,000 the entire amount is taxable.
• Applying a visiting-teacher exemption. Article 20 is gone except for people grandfathered in 2019.

Read from the treaty documents: Convention and Protocol of Nov. 6, 2003; Protocol of Jan. 24, 2013; Treasury Technical Explanations of the Convention and the 2013 Protocol. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the Japan treaty's LOB provision is Article 22).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• e In Japan, interest is exempt if (a) paid to certain financial institutions; (b) paid on indebtedness from the sale on credit of equipment or merchandise; (c) paid to Japan or its political subdivision, its central bank, and certain other wholly-owned government entities; or (d) paid to a pension fund if not derived from the carrying on of a business by the pension fund.
• g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
• u If enterprise earns income from leasing of equipment in the conduct of a trade or business, covered by Business Profits article (net tax). If passive income from the leasing of equipment, and not in Royalty article, covered by the Other Income article, if any. In Pakistan payment for TV broadcasting rights are covered by the Royalty article but not rental income from motion picture films.
• dd Amounts paid to certain pension funds that are not derived from the carrying on of a business, directly or indirectly, by the fund are exempt. This includes dividends paid by a REIT only if the conditions in footnote mm are met. For Sweden, to be entitled to the exemption, the pension fund must not sell or make a contract to sell the holding from which the dividend is derived within 2 months of the date the pension fund acquired the holding. The United States has competent authority arrangements (MAP) with some treaty jurisdictions (e.g. Netherlands and Switzerland) that describe which pension funds are eligible for the exemption. See the Competent Authority Arrangements page on irs.gov.
• mm The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is (a) an individual (or pension fund, in some cases) holding not more than a 10% interest in the REIT, (b) a person holding not more than 5% of any class of the REIT's stock and the dividends are paid on stock that is publicly traded, or (c) a person holding not more than a 10% interest in the REIT and the REIT is diversified.
• oo Dividends received from an 80% owned corporate subsidiary are exempt if certain ownership period and limitation on benefits conditions are met by the recipient. For Japan, greater than 50% ownership is necessary. See specific treaty article to determine other conditions.

Notes to the services table (IRS Table 2)

• 4 Does not apply to compensation for research work primarily for private benefit.
• 8 Does not apply to fees paid to a director of a U.S. corporation.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 25 Exemption does not apply if gross receipts (including reimbursements) exceed this amount.
• 45 The time limit pertains only to an apprentice or business trainee.
• 53 Treated as business profits under Article 7 (VII) of the treaty.
• 57 Remuneration for employment exercised aboard a ship or aircraft operated in international traffic by a resident of a contracting State may be taxed in that State. Canada may tax the income from employment if the income is derived by a resident of Canada and the ship or aircraft is operated by a resident of Canada. If operated by a Luxembourg resident and Luxembourg fails to tax the income, such income shall be taxed in the State of which the employee is a resident. The income may be taxed in Tunisia only if the ship or aircraft is operated by an enterprise that is managed and controlled in Tunisia.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

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