OnMarch30,2004the United States and Japan ratified a new Convention for theAvoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “New U.S.-Japan Treaty”). For withholding taxes, the New U.S.-JapanTreatybecame effective on July 1, 2004.

The 1971 Treaty

Under the prior U.S.-Japan income tax treaty, ratified in 1971 (the “1971 Treaty”), royalties derived by Japanese licensors fromlicenses of intellectual property toU.S. licensees and those derived by U.S. licensors from Japaneselicensees were taxed at the rate of ten percent of the total royalty payments due the licensor. For purposes of the 1971 Treaty, a U.S. licensee was considered a “with-holding agent” and was personally liable if it failed to withhold the requisite royalty taxes. Furthermore,in the event the U.S. licensee failed to withhold and the Japaneselicensor failed to satisfy its United States tax liability, then both the U.S. licensee and the Japanese licensor were liable for any taxes due, as well as interest and any applicable penalties. Since 1971, licensing agreements between U.S.

and Japanese persons or entities typically have provided for with-holding taxes at the ten percent rate and have contained other provisions reflecting the potentialliability of the parties for failure tofully comply with the withholding requirements of the 1971 Treaty.

Key Changes in the New U.S.-Japan Treaty

Withholding of Taxes on Royalties is No Longer Required

Fortunately, the practice of licensee withholding of royalty payments is now unnecessary. Under the New U.S.-Japan Treaty, royalties arising in the United States and payable to a company in Japan generally are taxed only in Japan unless the Japanese licensor has a permanent establishment in the U.S. or the licensor fails to give the correct IRS forms to the licensee on a timely basis.

Steps to take for

Existing Licenses

Though it is not necessary to amend current licensing agreementsto conform to the provisions of theNew U.S.-Japan Treaty, licensees should advise their licensors that they no longer will withhold ten percent of all royalties if they have received the correct IRS form.

Licensors not receiving such a notice should advise their licensees that withholding of taxes is no longer required in view of the New U.S.-Japan Tax Treaty. If with-holding has already occurred on payments after July 1, 2004, a licensor should insist on a refund.

Lawrence Rosenthal is the Co-Head of the Intellectual Pro perty Practice Group of Stroock & Stroock & Lavan LLP, Micah Bloomfield is a partner in Stroock’s Tax Practice Group, Mary Catherine Di Nunzio is an associate in Stroock ’s Intellectual Pro perty Practice Group, and Ian Shainbrown is an associate in Stroock’s Tax Practice Group.

For additional information on licensing foreign-owned technology, see “Understanding Taxes When Licensing Foreign-Owned Intellectual Pro perty,” LabToWallStreet, Summer 2004.For a more detailed analysis of the royalty provisions of the recent U.S.-Japan Tax Treaty, see “Implications of New U.S.-Ja pan Income Tax Treaty for Intellectual Pro perty Licenses,” Stroock SpecialBulletin, August 2, 2004 (http://www.stroock.com/publica­tions.cfm).

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