Announcement 2006-6
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Internal Revenue Bulletin:
2006-4
January 23, 2006
Announcement 2006-6
Japan Investment Bank Memorandum of Understanding
Contents |
The following is a copy of the Memorandum of Understanding (“MOU”)
entered into on December 27, 2005, by the Competent Authorities of the United
States and Japan, regarding the term “investment bank” in the
U.S.-Japan income tax treaty.
The text of the MOU is as follows:
[edit]
MEMORANDUM OF UNDERSTANDING
The Competent Authorities of the United States and Japan agree to the following Guidelines (“Guidelines”) concerning the meaning of the term “investment bank” under Article 11(3)(c)(i) of the Convention Between the Government of the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”). These Guidelines are entered into under paragraph 3 of Article 25 (Mutual Agreement Procedure).
In order to provide certainty to taxpayers, the Competent Authorities of the United States and Japan have confirmed that:
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As used in Article 11(3)(c)(i) of the Treaty, the term “investment
bank” means any person regularly engaged in one or more of the following
activities (“investment bank activities”) if 60% or more of its
gross income for each of the three taxable years preceding the taxable year
the interest payment is made (or if it has been in existence for less than
three taxable years, for each business year of its existence) arises from
such activities:
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<li>
Underwriting issues of stock, debt instruments or other securities under
best efforts or firm commitment agreements for customers.
</li>
<li>
Providing merger and acquisition advisory services, fiduciary services,
trust services, custodial services, clearing services, agency paying services,
collection agency services, investment or correspondent banking services,
financial or investment advisory services, or investment management services,
including fund management service.
</li>
<li>
Originating, structuring, purchasing, selling, discounting, or negotiating
on a regular basis notes, drafts, checks, bills of exchange, acceptances,
mortgages, industrial loans or other evidences of indebtedness for customers
including structured, project, and lease financing and factoring evidences
of indebtedness for unrelated parties; brokerage activities; purchasing or
selling stock, debt instruments, commodities, interest rate, or currency,
commodities or economic futures or other securities or derivative financial
products (including notional principal contracts) from or to customers; holding
stock, debt instruments and other securities as inventory for sale to customers;
arranging futures, forwards, options, foreign exchange transactions, or notional
principal contracts for, or entering into such transactions with customers;
borrowing or lending stocks or securities for customers, or engaging in securities
repurchase or reverse repurchase transactions with customers; providing margin
or any other financing for a customer secured by securities or money market
instruments, including repurchase agreements; providing financing in connection
with financial services activities; and engaging in hedging activities with
respect to the activities described in this paragraph 3.
</li>
<li>
Repackaging financial assets, including mortgages, into securities;
purchasing and/or holding such financial assets in contemplation of repackaging
them; or servicing activities with respect to such financial assets (including
the accrual of interest incidental to such activities).
</li>
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Look-through rules:
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Except to the extent provided in paragraph 3 of this Section B, for
purposes of applying the 60% gross income test of section A, if an entity
(tested entity) owns or controls (directly or indirectly) 50% or more of another
entity and the tested entity is affiliated with a registered securities dealer
that is resident in either the United States or Japan, the tested entity shall
be treated as engaging in the same activities as the other entity and as directly
earning its proportionate share of the gross income of the other entity with
respect to those activities. A tested entity is affiliated with a registered
securities dealer if
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<li>
the tested entity either owns or controls (directly or indirectly) 80%
or more of a registered securities dealer,
</li>
<li>
the tested entity is owned or controlled (directly or indirectly) 80%
or more by a registered securities dealer, or
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<li>
the tested entity, and a registered securities dealer, are both commonly
owned or controlled (directly or indirectly) 80% or more by an issuer of publicly
traded debt or equity securities.
</li>
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Group-wide tests.
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Gross income tests. For purposes of these Guidelines, no entity will
be considered an “investment bank” unless
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such entity and its affiliates, considered as a single entity, would
qualify under Section A (60-percent test), and
</li>
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The gross income with respect to the activities described in paragraphs
A.1, A.2 and A.4, above, of such entity and its affiliates (other than banks),
considered as single entity, is equal to or greater than 10% (ten-percent)
of all gross income of such entity and its affiliates (other than banks) other
than the gross income with respect to activities described in paragraphs A.3,
above (10-percent test).
</li>
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<li>
Such entity or an affiliate is engaged in activities described in paragraph
A.1 above,
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<li>
Such entity or an affiliate is engaged in activities described in paragraph
A.2 above,
</li>
<li>
Such entity or an affiliate is a member of one or more recognized stock
exchanges within the meaning of Article 22(5)(b)(i) or (ii), or such entity
or an affiliate is a market maker in one or more Over-the-Counter (“OTC”)
markets located in either the United States or Japan.
</li>
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<li>
One of the two entities owns (directly or indirectly) 80% or more of
the other entity, or
</li>
<li>
Both entities are commonly owned (directly or indirectly) 80% or more
by another entity.
</li>
- Publicly traded requirement A tested entity must either (a) be an issuer of publicly traded debt or equity securities, or (b) have at least 80 percent of its equity owned directly or indirectly by an issuer of publicly traded debt or equity securities.
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Confirmation of Benefits:
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The Competent Authority of a Contracting State shall make a primary
test (which shall consist of a determination by such Competent Authority that
self-certification has been properly submitted according to any applicable
domestic procedures) of whether an entity which is a resident of the Contracting
State and applies for the treaty benefit under Article 11(3)(c)(i) meets the
conditions provided in these Guidelines, and shall notify the Competent Authority
of the other Contracting State, as promptly as practicable after the self-certification,
of the name of each entity that has so certified.
</li>
<li>
The list of the notified entities shall be announced to the public and
renewed on an as-needed basis.
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<li>
If an entity which is a resident of a Contracting State ceases to meet
the conditions in these Guidelines due to a material change in the facts and
circumstances, or if it has been found to no longer meet the conditions in
these Guidelines by the secondary assessment by the Competent Authority of
the other Contracting State, such entity shall lose the entitlement to the
treaty benefit under Article 11(3)(c)(i) retroactively to the first day the
entity does not meet the conditions of these Guidelines.
</li>
| Robert H. Green Director, International (LMSB) Internal Revenue Service
U. S. Competent Authority December 27, 2005 Date | Keiji Aoyama Deputy Commissioner, International National Tax Agency
Japanese Competent Authority December 27, 2005 Date |
