Japan's National Tax Authority (NTA) has issued guidance on the tax treatment under Japanese law of items of income derived through a US limited partnership (LP) by Japanese resident partners. The guidance (Notice) confirms that a US LP is treated as fiscally transparent for Japanese tax purposes when applying the US-Japan Income Tax Treaty. Many law firms may recall a 2015 Japanese Supreme Court decision holding that a Delaware LP would not be treated as fiscally transparent for purposes of Japanese law. It was unclear how broadly the decision applied and in particular, whether partners resident in Japan would be treated as deriving income through the US LP for purposes of claiming treaty benefits. The Notice indicates that the NTA had received requests from taxpayers to clarify the tax treatment under Japanese law of items of income derived through a US LP.

The Notice now confirms that: (1) the NTA will treat an item of income paid to and through a US LP of which Japanese residents are partners as derived by the Japanese resident partners and subject to tax on a current basis in the hands of the partners, irrespective of actual distributions from the US LP; and (2) the character and source of the item of income in the hands of the Japanese partners are determined as if such items were realized directly from the source from which the US LP obtained the income, provided that the US LP has not elected to be classified as a taxable entity for US federal income tax purposes.

This is a helpful clarification from the NTA that, for purposes of applying the US-Japan tax treaty, a Japanese resident partner that derives income through a US LP and meets all other requirements under the treaty may be eligible to claim benefits.

This provides an increased level of certainty that US LPs should generally be treated as transparent for Japanese tax purposes. See Tax Alert 2017-299 for details.

———————————————