US announces entry into force dates for new tax treaty protocols with Japan and Spain

The US Treasury has announced that a protocol to the US-Japan tax treaty entered into force on August 30 with the exchange of ratification instruments in Tokyo and that a protocol to the US-Spain tax treaty entered into force on  November 27, 2019.

“These tax treaty protocols will help to create a level playing field for American businesses and workers, and foster stronger economic growth for both the United States and our trading partners,” said Secretary Steven T. Mnuchin. “We are pleased to continue working with members of the US Senate from both parties to achieve strong, bipartisan approval of modernized tax treaties and protocols to encourage investment and job growth in America.”

The US-Japan tax treaty protocol and related exchange of notes, signed in 2013, exempt from withholding all cross-border payments of interest and expands the withholding tax exemption for dividend payments.

Under the protocol, dividends are exempt from withholding if the beneficial owner of the dividends owns 50 percent or more of the voting stock in a company paying the dividends for at least six months. Taxation of capital gains from the sale of real property is also modified under the new agreement. Further, the US-Japan protocol provides for a system of mandatory arbitration to resolve cross-border tax disputes.

The US-Spain tax treaty protocol also provides for binding arbitration of tax treaty disputes involving Spain and the US.

Further, the new US-Spain tax treaty protocol reduces withholding tax on interest payments to zero except in limited cases involving contingent interest and real estate mortgage conduits. Similarly, most royalty payments will now be free of withholding taxes.

The withholding tax on dividends is reduced to zero under the protocol if the beneficial owner of the dividend is a pension fund or is a company that owns at least 80% of the voting stock of the company and held those shares for at least 12 months.

Withholding taxes on dividends is reduced to 5% if the beneficial owner of the dividends is a company owning 10% or more of the voting stock. Withholding tax on dividends is 15% in other cases.

Both protocols were ratified by the US Senate in July after a long delay. The US-Japan tax treaty protocol and related exchange of notes were signed in 2013; the protocol with Spain was signed on February 22, 1990.