US Tax Treaty with Japan: International Income Tax Counsel

US Tax Treaty with Japan: International Income Tax Counsel

US Japan Tax Treaty

The US-Japan Tax Treaty is a robust international tax treaty between the United States and Japan. International Agreements “US Tax Treaties” between the United States and foreign countries have existed for many years — and the US Japan Tax Treaty is no different. An Income Tax Treaty like the income tax treaty between Japan and the United States is designed to minimize inconsistent and double taxationalthough a tax treaty cannot (unfortunately) shield certain tax implications of items such as a foreign pension. Japan and the United States have been engaged in treaty relations for more than 50-years and first entered into a modern-day tax treaty nearly 51-years ago (1971). The treaty has been updated and revised multiple times since then — with the most recent version being 2003. The purpose of the US/Japan Tax Treaty is to help Taxpayers determine what their tax liability is for certain sources of taxable income involving parties to the treaty. While the US Japan Tax treaty is not the final word on how items of income will be taxed — it does help Taxpayers better understand how either the US Government and/or Japan will tax certain sources of income; what the IRS reporting requirements are — and whether or not the saving clause will further impact the outcome. Let’s review the basics of the US Japan Income Tax Treaty – and which income is taxable:

Saving Clause in the Japan-US Tax Treaty

As we work through the US Tax Treaty with Japan, one important thing to keep in mind is the saving clause. The saving clause is inserted into tax treaties in order to limit the application of the treaty to certain residents/citizens. With the saving clause, each country retains the right to tax certain citizens and residents as they would otherwise tax under general tax principles in their respective countries — absent the tax treaty taking effect.

Saving Clause

      • (a) Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4) and, in the case of the United States, its citizens.

      • (b) Notwithstanding the other provisions of this Convention, a former citizen or long-term resident of the United States may, for the period of ten years following the loss of such status, be taxed in accordance with the laws of the United States, if the loss of such status had as one of its principal purposes the avoidance of tax (as defined under the laws of the United States).

What does this Mean?

Paragraph four (4) of article one (1) refers to the infamous Saving Clause. The saving clause is in present in nearly all treaties and provides that despite any benefits that may be afforded under the tax treaty, each country reserves the right to still tax the way they want in accordance with their own country’s tax rules  — aside from any limitations identified in the paragraph below (Article 1, Paragraph 5). In other words, the tax treaty provides certain benefits — the saving clause restricts the application of those benefits  — and paragraph 5 below is an exception to the saving clause so that the treaty law should trump non-treaty law.

Saving Clause Exemptions

      • The provisions of paragraph 4 shall not affect the benefits conferred by a Contracting State under paragraphs 2 and 3 of Article 9, paragraph 3 of Article 17, and Articles 18, 19, 23, 24, 25 and 28, but in the case of benefits conferred by the United States under Articles 18 and 19 only if the individuals claiming the benefits are neither citizens of, nor have been lawfully admitted for permanent residence in, the United States.”

What does this Mean?

It means that despite the restriction and limitation on benefits under the treaty by way of the saving clause, the provisions identified in paragraph five (5) of article one (1) limit the application of the saving clause so that the treaty should still hold as to the benefits provided in the treaty.

Article 5 Permanent Establishment in the Japan-US Income Tax Treaty

      • 1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

      • 2. The term “permanent establishment” includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 

      • 3. A building site, a construction or installation project, or an installation or drilling rig or ship used for the exploration of natural resources, constitutes a permanent establishment only if it lasts or the activity continues for a period of more than twelve months.

      • 4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

What does this Mean?

The Permanent Establishment (PE) rules refer to the ability of a source country to tax income generated within its borders from a business in the other contracting party to the agreement when that business does not have a permanent establishment in the country of source. For example, if a U.S. business operates in Japan and generates income – but does not have a permanent establishment in Japan — then Japan is limited on their ability to tax that income. With the introduction of the TCJA in 2017, the rules involving taxation of international business are incredibly complicated — and despite any language in the treaty, it is something that should be carefully evaluated and addressed by anyone who may be impacted by permanent establishment rules — as early in the process as possible.

Article 6 Real Property in the Japan-US Income Tax Treaty

      • Income derived by a resident of a Contracting State from real property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other Contracting State.

      • 2. The term “real property” as used in this Convention shall have the meaning which it has under the laws of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to real property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting real property apply, usufruct of real property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits and other natural resources; ships and aircraft shall not be regarded as real property.

      • 3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of real property.

      • 4. The provisions of paragraphs 1 and 3 shall also apply to the income from real property of an enterprise.

What does this Mean?

The United States and Japan Tax Treaty, Article Six (VI) refers to income generated from real property and basically provides that if a Resident of one of the states generates income from the other state, then that other state may be able to tax the income. For example, a Resident of the United States with property situated in Japan that earns income — can have that income taxed in Japan.

Article 10 Dividends in the Japan-US Income Tax Treaty

      • 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State.

      • 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that Contracting State, but if the dividends are beneficially owned by a resident of the other Contracting State, except as provided in paragraphs 4 and 5, the tax so charged shall not exceed:

        • (a) 5 percent of the gross amount of the dividends if the beneficial owner is a company that owns directly or indirectly, on the date on which entitlement to the dividends is determined, at least 10 percent of the voting stock of the company paying the dividends;

        • (b) 10 percent of the gross amount of the dividends in all other cases.

      • This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

      • 3. Notwithstanding the provisions of paragraph 2, such dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends is:

      • (a) a company that is a resident of the other Contracting State, that has owned, directly or indirectly through one or more residents of either Contracting State, more than 50 percent of the voting stock of the company paying the dividends for the period of twelve months ending on the date on which entitlement to the dividends is determined, and that either:

        • (i) satisfies the conditions described in clause (i) or (ii) of subparagraph (c) of paragraph 1 of Article 22;

        • (ii) satisfies the conditions described in clauses (i) and (ii) of subparagraph (f) of paragraph 1 of Article 22, provided that the company satisfies the conditions described in paragraph 2 of that Article with respect to the dividends; or

        •  (iii) has received a determination pursuant to paragraph 4 of Article 22 with respect to this paragraph; or

      • (b) a pension fund that is a resident of the other Contracting State, provided that such dividends are not derived from the carrying on of a business, directly or indirectly, by such pension fund.

What does this Mean?

When it comes to dividends and the US Tax Treaty with Japan, it can become very complicated due to the fact that when a business is issuing dividends — and depending on the location of the business — may impact the rules. From a baseline perspective, when dividends paid by a company of one country (Japan for example) to a resident of the other country, it may be taxed in that other country (US). But, the country of source still reserves the right to tax that money as well (noting, that the foreign tax credits should have abated or minimize any double taxation).

Article 11 Interest in the Japan-US Income Tax Treaty

      • 1. Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State may be taxed only in that other Contracting State.

      • 2. Notwithstanding the provisions of paragraph 1:

        • (a) interest arising in a Contracting State that is determined by reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person, or any other interest similar to such interest arising in a Contracting State, may be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the beneficial owner of the 3 interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest; and

        • (b) a Contracting State may tax, in accordance with its domestic law, interest paid with respect to the ownership interests in an entity used for the securitization of real estate mortgages or other assets, to the extent that the amount of interest paid exceeds the return on comparable debt instruments as specified by the law of that Contracting State.

        • 3. Interest shall be deemed to arise in a Contracting State when the payor is a resident of that Contracting State. Where, however, the person paying the interest, whether such person is a resident of a Contracting State or not, has in a state other than that of which such person is a resident a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then:

          • (a) if the permanent establishment is situated in a Contracting State, such interest shall be deemed to arise in that Contracting State, and

          • (b) if the permanent establishment is situated in a state other than the Contracting States, such interest shall not be deemed to arise in either Contracting State.

        • 4. The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, and all other income that is subjected to the same taxation treatment as income from money lent by the tax laws of the Contracting State in which the income arises. Income dealt with in Article 10 shall not be regarded as interest for the purposes of this Convention.

        • 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein and the debtclaim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.

What does this Mean?

The concept of taxation of interest in the Japan US Income Tax Treaty is similar to that of dividends. The baseline perspective is that interest arising in one of the countries which is being paid to a resident of the other country is only taxed in that other country. Of course, there are numerous exceptions and limitations, so that under several circumstances, both countries can reserve the right to tax that income — but again, foreign tax credits should serve to minimize any double taxation.

Article 13 Gains in the Japan-US Income Tax Treaty

      • 1. Gains derived by a resident of a Contracting State from the alienation of real property situated in the other Contracting State may be taxed in that other Contracting State.

      • 2. (a) Gains derived by a resident of a Contracting State from the alienation of shares or other comparable rights in a company that is a resident of the other Contracting State and that derives at least 50 percent of its value directly or indirectly from real property situated in that other Contracting State may be taxed in that other Contracting State, 24 unless the relevant class of shares is traded on a recognized stock exchange specified in subparagraph (b) of paragraph 5 of Article 22 and the resident, and persons related thereto, own in the aggregate 5 percent or less of that class of shares.

      • (b) Gains derived by a resident of a Contracting State from the alienation of an interest in a partnership, trust or estate may be taxed in the other Contracting State to the extent that its assets consist of real property situated in that other Contracting State.

      • 3. (a) Where

        • (i) a Contracting State (including, for this purpose in the case of Japan, the Deposit Insurance Corporation of Japan) provides, pursuant to the domestic law concerning failure resolution involving imminent insolvency of financial institutions in that Contracting State, substantial financial assistance to a financial institution that is a resident of that Contracting State, and

        • (ii) a resident of the other Contracting State acquires shares in the financial institution from the first-mentioned Contracting State, the first-mentioned Contracting State may tax gains derived by the resident of the other Contracting State from the alienation of such shares, provided that the alienation is made within five years from the first date on which such financial assistance was provided.

      • (b) The provisions of subparagraph (a) shall not apply if the resident of that other Contracting State acquired any shares in the financial institution from the first- mentioned Contracting State before the entry into force of this Convention or pursuant to a binding contract entered into before the entry into force of the Convention.

      • 4. Notwithstanding the provisions of paragraph 3, gains from the alienation of any property, other than real property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other Contracting State.

What does this Mean?

It means that if gains are earned by residents of one country (US), as a result of selling or otherwise alienating property in the other country (Japan), may be taxed in that other country. This rule serves to ensure that the country of source has the opportunity to tax transactions within its borders. There are exceptions and limitations depending on the ownership percentage of the property. With reference to Article 13 of the Convention, it is understood that distributions made by a REIT shall be taxable under paragraph 1 of that Article, to the extent that they are attributable to gains derived from the alienation by the REIT of real property situated in the United States.

Article 16 Entertainers in the US Tax Treaty with Japan

          • 1. Income derived by an individual who is a resident of a Contracting State as an entertainer, such as a theater, motion picture, radio or television artiste, or a musician, or as a sportsman, from his personal activities as such exercised in the other Contracting State, which income would be exempt from tax in that other Contracting State under the provisions of Articles 7 and 14, may be taxed in that other Contracting State, except where the amount of the gross receipts derived by such entertainer or sportsman, including expenses reimbursed to him or borne on his behalf, from such activities does not exceed ten thousand United States dollars ($10,000) or its equivalent in Japanese yen for the taxable year concerned.

          • 2. Where income in respect of personal activities exercised in a Contracting State by an individual in his capacity as an entertainer or a sportsman accrues not to the individual himself but to another person that is a resident of the other Contracting State, that income may, notwithstanding the provisions of Articles 7 and 14, be taxed in the Contracting State in which the activities of the individual are exercised, unless the contract pursuant to which the personal activities are performed allows that other person to designate the individual who is to perform the personal activities.

What does this Mean?

Article 16 of the Japan US Income Tax Treaty refers to entertainers and other artists, and provides that if a resident of one contracting state performs in the other contracting state — and subject to other articles within the treaty — will be taxed in the other state , unless the amount of gross income including expense reimbursement is no more than $10,000.

Article 17 Pension in the US Tax Treaty with Japan

      • Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration, including social security payments, beneficially owned by a resident of a Contracting State shall be taxable only in that Contracting State.

      • Annuities derived and beneficially owned by an individual who is a resident of a Contracting State shall be taxable only in that Contracting State. The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during the life of the individual, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

      • Periodic payments, made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, including payments for the support of a child, paid by a resident of a Contracting State to a resident of the other Contracting State shall be taxable only in the first-mentioned Contracting State. However, such payments shall not be taxable in either Contracting State if the individual making such payments is not entitled to a deduction for such payments in computing taxable income in the first-mentioned Contracting State.

What does this Mean?

When it comes to pension, the basic rule is that pension and the other remuneration owned by a resident of one contracting state (Japan) is only taxable in that contracting. Unfortunately, it is not as good as it sounds for US Persons):

Example:

  • Maya is a US person who resides in Japan, and receives pension while residing in Japan. Therefore, she should only be taxed in Japan — and if Japan is not taxed that type of income, then she should be exempt, BUT Article 17 is not exempted from the Saving Clause, so US still has the right to tax the income.

Article 18 Government Wages in the Japan-US Income Tax Treaty

      • 1. (a) Salaries, wages and other similar remuneration, other than a pension and other similar remuneration, paid by a Contracting State or a political subdivision or local authority thereof to an individual in respect of services rendered to that Contracting State or political subdivision or local authority thereof, in the discharge of functions of a governmental nature, shall be taxable only in that Contracting State.

      • (b) However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that other Contracting State and the individual is a resident of that other Contracting State who: (i) is a national of that other Contracting State; or 28 (ii) did not become a resident of that other Contracting State solely for the purpose of rendering the services.

      • 2. (a) Any pension and other similar remuneration paid by, or out of funds to which contributions are made by, a Contracting State or a political subdivision or local authority thereof to an individual in respect of services rendered to that Contracting State or a political subdivision or local authority thereof, other than payments made by the United States under provisions of the social security or similar legislation, shall be taxable only in that Contracting State.

      • (b) However, such pension and other similar remuneration shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that other Contacting State. 3. The provisions of Articles 14, 15, 16 and 17 shall apply to salaries, wages and other similar remuneration, and to pensions and other similar remuneration, in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or local authority thereof.

What does this Mean?

This basically means that if salaries other than pension are being paid by one country for services rendered to that country, then it is only taxable in that country — unless the taxpayer resides in the other country in which the other country may have an opportunity to tax it if certain thresholds are met.

Article 26 Exchange of Information in the US Tax Treaty with Japan

      • 1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by paragraph 1 of Article 1 and Article 2. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of authenticated copies of original documents (including books, papers, statements, records, accounts, and writings).

      • 2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the laws of that Contracting State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection or 10 administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes referred to in paragraph 1, or the oversight of such functions. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

      • 3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

        • (a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

        • (b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

        • (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy; or

        • (d) to obtain or provide information that would reveal confidential communications between a client and an attorney, solicitor or other admitted legal representative where such communications are:

          • (i) produced for the purposes of seeking or providing legal advice; or

          • (ii) produced for the purposes of use in existing or contemplated legal proceedings.

      • 4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other Contracting State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

      • 5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.”

What does this Mean?

The purpose of article 26 is to facilitate the exchange of information between both countries so that each country can obtain the benefit of being in a mutual agreement with the other country. At the same time, the article also limits how certain information will be disseminated to avoid any various impingement on confidentiality or other disclosure that may be against the public policy of that country.

Article 27 Double Taxation in the Japan-US Income Tax Treaty

      • 1. Subject to the provisions of this Article, the Contracting States shall lend assistance to each other in the collection of taxes, insofar as the taxation is not contrary to this Convention or any other agreement to which the Contracting States are parties, together with interest, costs of collection, additions to such taxes, and civil or administrative penalties related to such taxes (hereinafter referred to in this Article as a “revenue claim”). This assistance is not restricted by paragraph 1 of Article 1 and Article

      • 2. Any assistance provided by a Contracting State shall be only to the extent allowable under the law of that Contracting State. 2. The assistance under paragraph 1 shall be lent only in the collection of the following revenue claims:

        • (a) a revenue claim in respect of a company:

          • (i) the determination of which is not eligible to be resolved by mutual agreement procedure pursuant to Article 25;

          • (ii) the determination of which has been mutually agreed upon pursuant to Article 25; or

          • (iii) with respect to the determination of which the company has terminated the mutual agreement procedure;

        • (b) a revenue claim in respect of an individual. However, if the individual is a national of the Contracting State from which assistance is requested (hereinafter referred to as the “requested State”) at the time the application for assistance is received, assistance shall be lent only for revenue claims with respect to which the individual or a person acting on behalf of the individual:

          • (i) has filed a fraudulent tax return or a fraudulent claim for refund;

          • (ii) has willfully failed to file a tax return to evade taxes; or

          • (iii) has transferred assets into the requested State to avoid collection of the revenue claim.

      • 3. Notwithstanding the provisions of paragraph 2, the assistance under paragraph 1 shall be lent in the collection of revenue claims that is necessary to ensure that any exemption or reduced rate of tax granted under this Convention shall not be enjoyed by persons not entitled thereto, provided that the requested State agrees with such determination of improper granting of benefits.

      • 4. The provisions of this Article shall only apply to 12 revenue claims in respect of the taxes covered by Article 2 and in addition, the following taxes:

        • (a) in the case of Japan:

          • (i) the consumption tax;

          • (ii) the inheritance tax; and

          • (iii) the gift tax;

        • (b) in the case of the United States:

          • (i) the Federal estate and gift taxes;

          • (ii) the Federal excise tax on insurance policies issued by foreign insurers;

          • (iii) the Federal excise taxes imposed with respect to private foundations; and

          • (iv) the Federal taxes related to employment and self-employment.

What does this Mean?

The purpose of article 26 is to facilitate cooperation between countries involved in the tax treaty, so that each country can obtain the benefits of the treaty. 

International Reporting to IRS (5 Common Forms)  

The following is a summary of five (5) common international tax forms.

FBAR (FinCEN 114)

The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.

The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?

If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.

Form 8938

This form is used to report “Specified Foreign Financial Assets.”

There are four main thresholds for individuals is as follows:

      • Single or Filing Separate (in the U.S.): $50,000/$75,000

      • Married with a Joint Returns (In the U.S): $100,000/$150,000

      • Single or Filing Separate (Outside the U.S.): $200,000/$300,000

      • Married with a Joint Returns (Outside the U.S.): $400,000/$600,000

Form 3520 

Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:

      • Gift from a Foreign Person: More than $100,000.

      • Gift from a Foreign Business: More than $16,649

      • Foreign Trust: Various threshold requirements involving foreign Trusts

Form 5471

Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:

    • Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.

    • Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.

    • Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.

    • Category 4: Control of a foreign corporation for at least 30 days during the accounting period.

    • Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).

Form 8621 

Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).

The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.

*There are some exceptions, exclusions, and limitations to the filing.

Receiving a Gift or Inheritance from Japan

If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).

Which Banks in Japan Report U.S. Account Holders?

As of now, there are nearly 2000 Foreign Financial Institutions, within Japan that report US account holder information to the IRS. The list can be found here: FFI List:.

What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR reporting, it may involve a much broader spectrum of assets and accounts, including:

      • Bank Accounts

      • Investment Accounts

      • Retirement Accounts

      • Direct Stock Ownership

      • ETF and Mutual Fund Accounts

      • Pension Accounts

      • Life Insurance or Life Assurance Policies

Totalization Agreement Between Japan and US

The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).

As provided by the IRS:

      • “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes.

      • These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country”

The United States has entered into 26 Totalization Agreements, including Japan.

Japan-US Income Tax Treaty Rules are Complex

In conclusion, The US and Japan tax treaty is a great source of information to help better understand how certain income may be taxed by either country depending on the source of income, the type of income, and the residence of the taxpayer. The tax outcome may be changed depending on whether or not the savings clause impacts how tax rules will be applied for certain types of income.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure on matters involving the United States/Japan Tax Treaty.

Contact our firm for assistance.