ARTICLE 10

Shipping and Air Transport

This article provides that, notwithstanding Article 8 (relating to business profits) and Article 16 (relating to capital gains), income which a resident of the United States derives from operation in international traffic of ships or aircraft registered in the United States, and gains which a resident of the United States derives from the sale; exchange, or other disposition of ships or aircraft operated in international traffic by such resident and registered in the United States, are exempt from tax in Japan.

This article provides a similar exemption from United States tax for such income and gains derived by a resident of Japan. However, with regard to income of residents of Japan, the ships or aircraft need not be registered in Japan if they are leased by such a resident.

This article does not contain any provision exempting shipping or air profits from local taxes. However, it was agreed in an exchange of notes accompanying the Convention that the enterprise tax levied in Japan on behalf of local governments would not be imposed on United States airlines and shipping companies if state, county, or local governments in the United States do not levy upon Japanese airlines and shipping companies any tax of a character substantially similar to the enterprise tax in Japan. The enterprise tax is a tax imposed by Japan for the prefectures upon net profits from business. It is imposed upon both individuals and corporations, although the rates and method of calculating net profits are somewhat different. At the present time, no such state or local tax is imposed on Japanese airlines and shipping companies in the United States.

In addition, notes were exchanged covering the use of containers in international traffic and the lease of ships or aircraft used in international traffic. It was agreed that income derived by a resident engaged in the operation in international traffic of ships or aircraft from the use, maintenance, or lease of containers and related equipment in connection with such operations is exempt as falling within the scope of this article. It was also agreed that income derived by a resident engaged in the operation in international traffic of ships or aircraft from a full or bareboat charter to another person engaged in the operation in international traffic of ships or aircraft also falls within the scope of this article.

Consistent with the above principles, other income from the leasing of ships or aircraft received by a person engaged in the operation in international traffic of ships or aircraft ( i.e., a lease to a person not engaged in international traffic) may also be within the scope of this article if such leasing activity is subsidiary and ancillary to the lessor's international operations.