Article 14 of the Convention — U.S. Income Tax Treaty

and other similar remuneration derived by a resident of one country in respect of an employment by providing generally that the other country (the “source” country) may tax such income if the employment is exercised in such source country and certain other conditions are met. Paragraph 10 of the Protocol provides that the benefits enjoyed by employees under stock option plans relating to the period between grant and exercise of an option are regarded as “other similar remuneration” for the purposes of Article 14.

Paragraph 10 of the Protocol further provides that the source country may tax only that proportion of such benefits which relates to the period or periods between the grant and the

exercise of the option during which the individual has exercised the employment in that source country. Neither Article 14 nor paragraph 10 of the Protocol provides rules regarding when or in what manner the source country may tax such income. The source country may tax such income or may choose to forego taxation of such income in some or all circumstances. For example,Japan as the sourcecountrymay tax such income upon the sale of the stock acquired through the exercise of a qualified stock option, and the United States as the source country may tax such income earned by non-resident citizens without resort to subparagraph(a) of paragraph 4 of Article 1. The limitations in Article 13 on the taxation of gains on the sale of stock by nonresidentsare not relevant to the taxation of such

income because paragraph 10 of the Protocol provides that such income is regarded as “other similar remuneration” for the purposes of Article 14. Under Article 23, any tax imposed by the source country on a resident of the other country on such income in accordancewith the Convention,includingArticle 14 and paragraph 10 of the Protocol, shall be allowed as a credit against the tax imposed on that resident by the country of residence, subject generally to domestic law limitationson the foreign tax credit in the country of residence (as discussedbelow).

Our detailed discussions related to the treatment of stock options under the Convention