ARTICLE 3

Fiscal Domicile

This article sets forth rules for determining the "residence" of individuals, corporations and other persons for purposes of the Convention. Residence is important because, in general, only a resident of one of the Contracting States may qualify for the benefits of the Convention. This article is patterned generally after the fiscal domicile article of the OECD Model Convention.

The term "a resident of Japan" means a Japanese corporation as defined in Article 2 (relating to general definitions) and any other person who is a resident of Japan for purposes of its tax. The term "a resident of the United States" means a United States corporation as defined in Article 2 and any other person (except a corporation or any other entity treated as a corporation for United States tax purposes) resident in the United States for purposes of its tax. The parenthetical language in the definition of a resident of the United States is intended to make clear that a foreign corporation which is engaged in trade or business in the United States and which as a result is treated as a resident foreign corporation for certain purposes of United States income tax law is not) under the Convention, a resident of the United States. Such clarifying parenthetical language was unnecessary in the case of Japan, because Japan does not treat foreign corporations as Japanese residents for any tax purpose (although foreign corporations having a permanent establishment in Japan are taxed differently from those not having a permanent establishment in Japan).

The Convention provides in the case of the United States, that an estate or trust is treated as a resident with respect to income it receives only to the extent that such income is subject to United States tax as the income of a resident. Under United States law, a partnership is never, and an estate or trust is often not taxed as such. Under the Convention, in the case of the United States, income received by an estate or trust will not qualify for the benefits of the Convention unless such income is subject to tax in the United States. Thus, the status of income which is subject to tax only in the hands of the beneficiaries will be determined by the residence of such beneficiaries. With respect to income taxed in the hands of the estate or trust, the residence of the

estate or trust is determinative. This provision is non-reciprocal because of the absence of a similar problem under Japanese law. Partnerships are not specifically included in the provisions, since the income of a partnership is subject to tax only in the hands of the partners and, thus, it is clear that for treaty purposes the residences of the partners are relevant with respect to income derived by the partnership rather than the residence of the partnership.

An individual who is a resident of both States under the rules of domestic law employed by such States for determining residence will be deemed a resident of the Contracting State in which he has his permanent home, his center of vital interests (closest economic and personal relations), his habitual abode, or his citizenship, in the order listed. If the issue is not settled by these tests, the competent authorities will decide by mutual agreement the one State of which he will be considered to be a resident.

An individual who is deemed to be a resident of one Contracting State by reason of Article 3 (3) will be deemed to be a resident of only that State for all purposes of the Convention, including the savings clause of Article 4 (3). For example, even if an individual treated as a resident of Japan under the Convention is also considered to be a resident of the United States under the laws of the United States, such individual would continue to receive the exemptions and special benefits available only to Japanese residents) assuming he is not a citizen of the United States.