Japan Proposes Expanding Withholding Tax Exemption on Government Bonds

Washington, DC, February 27, 2001 - Legislation was introduced in Japan that would expand the withholding tax exemption for Japanese government bonds (JGBs) to include nonresident investors that maintain custody of JGBs through global custodians. This is an important change for the U.S. mutual fund industry, since many U.S. mutual funds have been unable to qualify for the current exemption. (The current law provides that individual nonresidents of Japan and foreign corporations are exempt from Japanese withholding tax on interest payments on JGBs, provided certain conditions are met concerning how the securities are held. U.S. mutual funds have not been able to meet these conditions while maintaining custody of JGBs through their global custodians.)

The proposed legislation would allow a nonresident investor, such as a U.S. mutual fund, that uses a "qualified foreign intermedary" (QFI) or a chain of QFIs to maintain custody of the JGBs to claim the withholding tax exemption. The legislation would require global custodians to obtain QFI status, and would require the nonresident investor to submit documentation to the Japanese tax authorities (via the QFI and the local subcustodian) that would entitle the nonresident investor to claim the withholding tax exemption.