The U.S.-Japan Estate and Gift Tax Treaty

While the United States has entered into nearly 60 bilateral income tax treaties with foreign countries across the globe, the U.S. has also entered into several different estate and gift tax treaties as well. While the estate and gift tax treaties are not as common as the income tax treaties, the purpose is the same. The goal is to help Taxpayers who may be considered citizens/residents of one or both countries avoid having to pay duplicative taxes in both jurisdictions. One of the more common applications of the estate and gift tax treaty is the treaty between the United States and Japan. Let’s take a walk through the basics of the United States and Japan estate and gift tax treaty (in pertinent part).

U.S. Geographical Application                                            

When the Treaty refers to the United States, it is important to note that it also includes the territories of Alaska and Hawaii as well as the District of Columbia. Presumably, other territories and possessions of the United States would not necessarily be protected under this specific treaty.

The Japan Estate and Gift Tax Treaty with the U.S., an Overview

Situs Determination of Property 

One of the most important aspects of an estate and gift tax treaty is to determine which type of property is subject to estate or gift taxes and in which country. The way that the estate and gift tax treaty accomplishes this goal, is by breaking it down into different categories so that beneficiaries and decedents can determine where their specific property should be subject to taxation (or primarily subject to taxation).

For example, immovable property, such as real estate is considered situs in the country where it is located. Therefore, if a property was located in Japan, then that immovable property would be situs of Japan. Likewise, when property is movable tangible property, such as money it will be based on where it is physically located — or if it is in the process of being in transit or being moved or relocated, at the place of destination.

Other items such as shares of stock are situated under the laws of where the corporation was organized and items such as copyright in franchises are situated in the place in which they are being exercised. Depending on the specific type of property and if that property has been transmuted will all impact what the specific site of that property will be determined to be — which subsequently will impact which rules and laws may apply for tax purposes

Especially in situations in which there are high-value assets, it is very important to determine the situs of the property.

Article IV

Article 4 of the Japan and US estate and gift tax treaty applies in situations in which one of the contracting states determines that a tax applies solely because of the situs rules of the property.

• Where one of the contracting States imposes the tax solely byreason of the situs of property within such State, in the case of a decedent who at the time of his death, or of a donor who at the time of
  the gift, was a national of or domiciled in the United States, or in thecase of a beneficiary of a decedent’s estate who at the time of suchdecedent’s death, or a beneficiary of a gift who at the time of thegift, was domiciled in Japan, the contracting State so imposing the tax:

  • • shall allow a specific exemption which would be applicableunder its laws if the decedent donor, or beneficiary, as the case maybe, had been a national of or domiciled in such State, in an amount notless than the proportion thereof which

      • (A) the value of the property, situated according to Article III in such State and subjected to the taxes of both contracting States or which would be so subjected except for a specific exemption, bears to

      • (B) the value of the total property which would be subjected to the tax of such State if such decedent, donor, or beneficiary had been a national of or domiciled in such State; and shall (except for the purpose of subparagraph (a) of this paragraph and for the purpose of any other proportional allowance otherwise provided) take no account of property situated according to Article III outside such State in determining the amount of the tax.

What does this Mean?

This is a very dense section of the treaty and refers specifically to property that is taxed by one of the contracting parties based solely on situs. For example, let’s say a Japanese Citizen has property in the U.S. They are not U.S. Persons but rather Japanese citizens and nationals. Thus, the United States only right to levy tax is based on the situs of property being located in the U.S. And, because Article IV of the U.S. and Japan provides that in the case of a beneficiary of a decedent’s estate who at the time of such decedent’s death, or a beneficiary of a gift who at the time of the gift, was domiciled in Japan, the U.S would limit the taxation by allowing an exemption relative to the value of property relative to the total value of the property. Likewise, when the scenario involves a U.S. national who owns property in Japan, the gift or estate tax of Japan would be exempt.

Article V

• • • Where either contracting State imposes the tax by reason of thenationality thereof or the domicile therein of a decedent or a donor ora beneficiary of a decedent’s estate or of a gift, such State shallallow against its tax (computed without application of this Article) a
      credit for the tax imposed by the other contracting State with respectto property situated at the time of the transfer in such other State andincluded for the taxes of both States (but the amount of the credit shall not exceed that portion of the tax imposed by the crediting State
      which is attributable to such property). The provisions of thisparagraph shall not apply with respect to any property referred to inparagraph (2) of this Article.

    • Where each contracting State imposes the tax by reasons of thenationality thereof or the domicile therein of a decedent or a donor ora beneficiary, with respect to any property situated at the time of thetransfer outside both contracting States (or deemed by each contractingState to be situated in its territory, or deemed by one contractingState to be situated in either contracting State and deemed by the othercontracting State to be situated outside both contracting States ordeemed by each contracting State to be situated in the other contracting State), each contracting State shall allow against its tax (computedwithout application of this Article) a credit for a part of the taximposed by the other contracting State attributable to such property.

    • The total of the credits authorized by this paragraph shall be equal tothe amount of the tax imposed with respect to such property by thecontracting State imposing the smaller amount of the tax with respect tosuch property, and shall be divided between both contracting States inproportion to the amount of the tax imposed by each contracting Statewith respect to such property.

    • The credit authorized by this Article, if applicable, shall bein lieu of any credit for the same tax authorized by the laws of thecrediting State, the credit applicable for the particular tax beingeither credit authorized by this Article or credit authorized by suchlaws, whichever is the greater. For the purposes of this Article, theamount of the tax of each contracting State attributable to anydesignated property shall be ascertained after taking into account anyapplicable diminution or credit against its tax with respect to suchproperty (other than any credit under paragraph (1) or (2) of thisArticle), provided, however, in case another credit for the tax of anyother foreign State is allowable with respect to the same propertypursuant to any other convention between the crediting State under thepresent convention and such other foreign State, or pursuant to the lawsof the crediting State, the total of such credits shall not exceed theamount of tax of the crediting State attributable to such propertycomputed before allowance of such credits.

    • Credit against the tax of one of the contracting States for thetax of the other contracting State shall be allowed under this Articleonly where both such taxes have been simultaneously imposed at the timeof a decedent’s death or at the time of a gift.

    • No credit resulting from the application of this Article shallbe allowed after more than five years from the due date of the taxagainst which credit would otherwise be allowed, unless claim thereforwas filed within such five-year period. Any refund resulting from theapplication of this Article shall be made without payment of interest onthe amount so refunded, unless otherwise specifically authorized by thecrediting State.

    • Credit against the tax of one of the contracting States shallnot be finally allowed for the tax of the other contracting State untilthe latter tax (reduced by credit authorized under this Article, if any) has been paid.

What does this Mean?

It means that the contracting states (U.S. and Japan) allow each other credits against the tax that the other country would apply.

ARTICLE VI

• • • The competent authorities of both contracting States shallexchange such information available under the respective tax laws ofboth contracting States as is necessary for carrying out the provisionsof the present convention or for the prevention of fraud or for theadministration of statutory provisions against tax avoidance in relationto the tax. Any information so exchanged shall be treated as secret andshall not be disclosed to any person other than those, including acourt, concerned with the assessment and collection of the tax or thedetermination of appeals in relation thereto. No information shall beexchanged which would disclose any trade, business, industrial orprofessional secret or any trade process.

    • Each of the contracting States may collect the tax imposed bythe other contracting State (as though such tax were the tax of theformer State) as will ensure that the credit or any other benefitgranted under the present convention by such other State shall not be enjoyed by persons not entitled to such benefits.

What does this Mean?

It just means that the countries that are party to the agreement agree to exchange information necessary to carry out the provisions of the treaty and to avoid fraud.

ARTICLE VI

• • • Where representative of the estate of a decedent or a beneficiaryof such estate or a donor or a beneficiary of a gift shows proof thatthe action of the tax authorities of either contracting State hasresulted, or will result, in double taxation contrary to the provisionsof the present convention, such representative, donor or beneficiaryshall be entitled to present the facts to the competent authorities ofthe contracting State of which the decedent was a national at the timeof his death or of which the donor or beneficiary is a national, or ifthe decedent was not a national of either of the contracting States atthe time of his death or if the donor or the beneficiary is not anational of either of the contracting States, to the competentauthorities of the contracting State in which the decedent was domiciledor resident at the time of his death or in which the donor orbeneficiary is domiciled or resident. Should the claim be deemed worthyof consideration, the competent authorities of such State to which thefacts are so presented shall undertake to come to an agreement with thecompetent authorities of the other contracting State with a view toequitable avoidance of the double taxation in question.

What does this Mean?

This provision is designed to ensure that if the application of the treaty results in an unfair tax outcome (double taxation), the representative or other party may prevent facts to the competent authorities in order to avoid an unjust outcome.

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