ARTICLE 16

Capital Gains

The 1954 Convention provided no special rules for gains derived in one State from the sale or exchange of stock, securities, commodities, or other capital assets by a resident of the other State. The new Convention provides that such gains shall be taxable only by the resident's State. However, the other State may also tax such gain if

(1) the gain derived by the resident arises out of the sale or exchange of property described in Article 15 (relating to income from real property) which is situated within the other State,

(2) the gain arises out of a sale or exchange described in paragraph (3)(b) of Article 14 (relating to royalties) and is taxable in the other State under that Article,

(3) the recipient of the gain has a permanent establishment in the other State and the property giving rise to the gain is effectively connected with such permanent establishment, or

(4) the recipient of the gain, being an individual, either is present in the other State for a period or periods aggregating more than 183 days in the taxable year or maintains, for a period or periods aggregating more than 183 days during the taxable year, a fixed base in the other State with which the property giving rise to such gains is effectively connected.

Gains arising from property which is effectively connected with a permanent establishment may be taxed as industrial or commercial profits under Article 8 (relating to business profits). Gains on real property are subject to the provisions of Article 15 (relating to income from real property) which permits taxation of such gains by the State in which the real property is situated. The fixed base concept is discussed in greater detail in relation to Article 17 (relating to independent personal services).

Under Japanese tax law, without regard to the Convention, gains from the sale of patents and similar intangible property or rights are considered royalties. By reason of this article (and Article 14), however, such gains, except those described in paragraph (3)(b) of Article 14 (relating to sales of intangibles where the purchase price is contingent upon productivity or use) are treated as capital gains and not as royalties for all purposes of the Convention.

Although under Japanese law, in certain circumstances, a foreign stockholder of a Japanese corporation is subject to Japanese tax on the disposition of the stock of the Japanese corporation regardless of the reorganization nature or place of the disposition, this article may nevertheless apply to exempt U.S. stockholders from such tax.