Japanese withholding tax on royalties

September 26, 2010  |  Withholding tax

A tasty looking Japanese Taraba gani soup. In English, King Crab latin name Paralithodes camtschaticus

The table linked to this article summarizes the withholding tax rates on royalties under Japan’s different tax treaties.

The withholding tax rate under Japan’s model tax treaty is 10 per cent. More recent tax treaties have seen the rate reduced to zero, although along with limitation of benefits clauses and similar more modern articles such as the recognition of pass through status.

A few points come out of comparison between the terms of treaties of different countries:

  • The India Japan treaty is the only one to include the provision of technical services within the definition of royalties and apply a withholding tax rate of 10%. For many other countries such income would be treated as business income taxable only in the country of residence in the absence of a permanent establishment in the other treaty country. The non treaty protected position would likely be the imposition of a 20 per cent withholding tax and an obligation to file a tax return as explained here. This is is probably to India’s disadvantage given the success of its business services industries.

  • A number of treaties include gains on the transfer of patent rights in royalties although many do not. This could be a potentially important planning point.

  • Treaties with the former communist bloc countries tend to impose lower rates of royalties paid on underlying cultural rights, a rare welcome legacy from that era.

WHT on royalties

Click on the table to the left or the link in the introduction above to access the table.

 

 

 

 


2 Comments


  1. re: Japanese withholding tax on royalties

    Your Table shows USA as exempted. However, the Japanese company in Japan claims they are required to deduct 20% withholding tax on royalty payment. Please advise which is correct.

  2. Hello – the domestic rate of Japanese withholding tax is 20 per cent, but if the royalties are being received by a US resident company that can claim the benefits of the US/Japan tax treaty then the rate can be reduced to zero. I am assuming that the royalties are not being paid to the Japanese branch of a US entity as the rules are a little different here (in this case the branch could probably claim back the withholding tax when it files its Japanese branch tax return).

    You can see the zero rate by looking at article 12 of the US Japan tax treaty that is linked here where I have substituted in “Japan” and “United States” to make the meaning clear.

    Article 12 says “…Royalties arising in [Japan] and beneficially owned by a resident of the [United States] may be taxed only in [the United States].

    2. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, or secret formula or process, or for information concerning industrial, commercial or scientific experience

    Or in other words a zero rate applies as the income may only be taxed in the US.

    However in order to claim the lower rate of withholding tax the relevant form for royalties from this page has to be completed and submitted by the Japanese company to its local tax office prior to payment of the royalty concerned. A US company will also have to complete the “US LOB” form further down on the page.

    Regrettably some Japanese companies may not want to go to the inconvenience of filing this form for you and also if there is an error in the form they may be liable to penalties. You probably should check your contract with the Japanese company to see whether either (1) you have a “gross up clause” that requires the payor of the royalty to make you whole if a withholding tax applies or (2) whether your contract says that the payor has to co-operate with you in reducing taxes.

    I would add if your standard contract doesn’t have clauses like the above you could consider including them.

    If you have already suffered the withholding tax you can claim a repayment under the Japan/US tax treaty. You will also need co-operation from the company in that they have to certify that the tax was withheld. To do this you need the form also on this page – the repayment form at the bottom.

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