Certain U.S. residents expecting to receive dividends from Japan-listed companies in 2014 will need to take action to receive the benefit of reduced withholding rates under the U.S.-Japan income tax treaty.
Under Japan’s domestic tax regime, a Japanese company paying a dividend to a nonresident shareholder must generally withhold 20% of the dividend amount and remit that amount to the Japanese tax authorities. However, dividends on publicly traded shares of Japanese companies historically have been subject to a preferential withholding tax rate of about 7%, provided that the nonresident shareholder owns less than 5% of the company. Under the U.S.-Japan income tax treaty, the Japanese withholding tax on a dividend paid to a U.S. resident is limited to 10%, provided that the U.S. resident owns less than 10% of the company. (On Jan. 24, 2013, the United States and Japan signed a protocol to the U.S.-Japan income tax treaty amending several provisions with respect to taxation of dividends. These amendments do not change the 10% wittholding rate applicable to U.S. residents who own less than 10% of the Japan-resident dividend payor.)
Because Japan’s domestic withholding rate of 7% on dividends from listed companies has historically been lower than the U.S.-Japan income tax treaty withholding rate of 10%, U.S. residents had generally not needed to consider whether they qualified for the 10% rate. However, beginning on January 1, 2014, Japan’s domestic withholding rate on dividends of Japanese publicly traded shares paid to nonresidents increased to 15.315%. As a result, U.S. residents receiving dividends from Japanese-listed companies will now prefer to claim the treaty withholding rate of 10% (versus the new Japan domestic rate of 15.315%).
To qualify for the 10% withholding rate, a U.S. resident must file several forms with Japan’s tax authorities prior to the date of the first dividend payment:
- Form 1 “Application Form for Income Tax Convention”
- Form 16 “List of Members of Foreign Company or List of the Partners of Entity” (required only when the U.S. resident is a flow-through entity such as a single member LLC or a partnership)
- Form 17 “Attachment Form for Limitation of Benefits Article”
- A U.S. residency certificate issued by the IRS, which must be attached to Form 17 (The IRS provides this residency certificate on Form 6166, a computer-generated letter printed on stationery bearing the U.S. Department of the Treasury letterhead. The Form 6166 will certify that the requestor was, or is, a resident of the United States for purposes of U.S. taxation for the period for which certification is requested.)
A separate Form 1, Form 17 and U.S. residency certificate is required for each distinct payor of dividends. A U.S. resident requesting a residency certificate must prepare, and submit to the IRS, a Form 8802 “Application for United States Residency Certification” along with an application fee of $85. The IRS recommends submitting the Form 8802 at least 45 days prior to the date the residency certificate is needed.
As the timing of dividend payouts may be uncertain, U.S. residents often file an early submission for current-year certification. The IRS will accept early submissions as long as the request for U.S. residency certification is postmarked no earlier than Dec. 1 of the year preceding the year for which certification is requested. Thus, U.S. residents who expect to receive dividends from Japanese-listed companies in 2014 can now request U.S. residency certification for 2014.
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