PROTOCOL 

At the signing of the Convention between the Government of the United States of 

America and the Government of Japan for the Avoidance of Double Taxation and the 

Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter referred to as “the 

Convention”), the Government of the United States of America and the Government of Japan 

have agreed upon the following provisions, which shall form an integral part of the Convention. 

1. Notwithstanding the provisions of Article 2 of the Convention: 

(a) the United States excise tax on insurance policies issued by foreign insurers 

shall not be imposed on insurance or reinsurance policies, the premiums on which are 

the receipts of a business of insurance carried on by an enterprise of Japan, to the extent 

that the risks covered by such premiums are not reinsured with a person not entitled to 

the benefits of the Convention or any other tax convention entered into by the United 

States that provides exemption from such tax; and 

(b) the United States excise tax with respect to private foundations shall not be 

imposed on: 

(i) dividends or interest derived by private foundations organized in Japan at 

a rate in excess of the rates provided for in Articles 10 and 11 of the Convention, 

respectively; and 

(ii) royalties or other income derived by private foundations organized in 

Japan. 

2. With reference to subparagraph (e) of paragraph 1 of Article 3 of the Convention, the 

term “any other body of persons” includes an estate, trust, and partnership. 

3. With reference to subparagraph (m) of paragraph 1 of Article 3 of the Convention, it is 

understood that a pension fund shall be treated as exempt from tax with respect to the activities 

described in clause (ii) of that subparagraph even though it is subject to the tax stipulated in 

Articles 8 or 10-2 of the Corporation Tax Law (Law No. 34 of 1965) of Japan or paragraph 1 of 

Article 20 of its supplementary provisions. 
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4. In general, where an enterprise of a Contracting State which has carried on business in 

the other Contracting State through a permanent establishment situated therein, receives, after 

the enterprise has ceased to carry on business as aforesaid, profits attributable to the permanent 

establishment, such profits may be taxed in that other Contracting State in accordance with the 

principles stated in Article 7 of the Convention. 

5. With reference to Article 9 of the Convention, it is understood that, in determining the 

profits of an enterprise, application of the arm's length principle under that Article is generally 

based on a comparison of the conditions in the transaction made between the enterprise and an 

enterprise associated with it and the conditions in transactions between independent enterprises. 

It is also understood that the factors affecting comparability shall include: 

(a) the characteristics of the property or services transferred; 

(b) the functions of the enterprise and the enterprise associated with it, taking into 

account the assets used and risks assumed by the enterprise and the enterprise 

associated with it; 

(c) the contractual terms between the enterprise and the enterprise associated with 

it; 

(d) the economic circumstances of the enterprise and the enterprise associated with 

it; and 

(e) the business strategies pursued by the enterprise and the enterprise associated 

with it. 

6. With reference to paragraphs 4 and 5 of Article 10 of the Convention, a United States 

Real Estate Investment Trust (hereinafter referred to as a “REIT”) or a company which is 

entitled to a deduction for dividends paid to its beneficiaries in computing its taxable income in 

Japan is “diversified” if the value of no single interest in real property exceeds 10 percent of the 

total interests of such person in real property. For purposes of this paragraph, foreclosure 

property will not be considered an interest in real property. Where such person holds an 

interest in a partnership, it shall be treated as owning directly a proportion of the partnership’s 

interests in real property corresponding to the proportion of its interest in the partnership. 
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7. With reference to paragraph 9 of Article 10 of the Convention, it is understood that the 

amount of such income that is equivalent to the amount of dividends that would have been paid 

if such activities had been conducted in a separate legal entity shall be, for any taxable year, the 

after-tax earnings from the company’s activities described in that paragraph, adjusted to take 

into account changes in the company’s investment in the Contracting State imposing the tax 

referred to in that paragraph. 

8. Fees received in connection with a loan of securities, guarantee fees and commitment 

fees paid by a resident of a Contracting State and beneficially owned by a resident of the other 

Contracting State shall be taxable only in that other Contracting State unless the beneficial 

owner of such fees carries on business in the first-mentioned Contracting State through a 

permanent establishment situated therein and such fees are attributable to, or the right in respect 

of which such fees are paid is effectively connected with, such permanent establishment. 

9. 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. 

10. (a) With reference to Article 14 of the Convention, it is understood that the benefits 

enjoyed by employees under stock option plans relating to the period between grant and 

exercise of an option are regarded as “other similar remuneration” for the purposes of 

that Article. 

(b) It is further understood that where an employee: 

(i) has been granted a stock option in the course of an employment; 

(ii) has exercised that employment in both Contracting States during the 

period between grant and exercise of the option; 

(iii) remains in that employment at the date of the exercise; and

(iv) under the domestic law of the Contracting States, would be taxable in 

both Contracting States in respect of such benefits, 

then, in order to avoid double taxation, a Contracting State of which, at the time of the 

exercise of the option, the employee is not a resident may tax only that proportion of 
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such benefits which relates to the period or periods between grant and exercise of the 

option during which the individual has exercised the employment in that Contracting 

State. With the aim of ensuring that no unrelieved double taxation arises the competent 

authorities of the Contracting States shall endeavor to resolve by mutual agreement 

under Article 25 of the Convention any difficulties or doubts arising as to the 

interpretation or application of Articles 14 and 23 of the Convention in relation to such 

stock option plans. 

11. With reference to subparagraph (c) of paragraph 1 of Article 22 of the Convention, the 

shares in a class of shares are considered to be regularly traded on one or more recognized 

stock exchanges in a taxable year if the aggregate number of shares of that class traded on such 

stock exchange or exchanges during the preceding taxable year is at least 6 percent of the 

average number of shares outstanding in that class during that preceding taxable year. 

12. With reference to paragraph 2 of Article 22 of the Convention, in determining whether a 

person is “engaged . . . in the active conduct of a trade or business” in a Contracting State under 

that paragraph, activities conducted by a partnership in which such person is a partner and 

activities conducted by persons connected to such person shall be deemed to be conducted by 

such person. A person shall be connected to another if one possesses at least 50 percent of the 

beneficial interest in the other (or, in the case of a company, at least 50 percent of the aggregate 

vote and value of the company’s shares) or if another person possesses, directly or indirectly, at 

least 50 percent of the beneficial interest (or, in the case of a company, at least 50 percent of the 

aggregate vote and value of the company’s shares) in each person. 

13. (a) For the purposes of applying the Convention, the United States may treat an 

arrangement created by a sleeping partnership (Tokumei Kumiai) contract or similar 

contract as not a resident of Japan, and may treat income derived subject to the 

arrangement as not derived by any participant in the arrangement. In that event, neither 

the arrangement nor any of the participants in the arrangement will be entitled to 

benefits of the Convention with respect to income derived subject to the arrangement. 

(b) Nothing in the Convention shall prevent Japan from imposing tax at source, in 

accordance with its domestic law, on distributions that are made by a person pursuant to 
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a sleeping partnership (Tokumei Kumiai) contract or other similar contract and that are 

deductible in computing the taxable income in Japan of that person. 

IN WITNESS WHEREOF the undersigned, being duly authorized thereto by their 

respective Governments, have signed this Protocol. 

DONE in duplicate at Washington this sixth day of November, 2003, in the English and 

Japanese languages, each text being equally authentic. 

FOR THE GOVERNMENT OF FOR THE GOVERNMENT OF 

THE UNITED STATES OF AMERICA: JAPAN: