On December 17, 2015 the Japanese Ministry of Finance issued a press release announcing that on that same date Japan and the Federal Republic of Germany signed an Agreement for the Elimination of Double Taxation with respect to Taxes on Income and to Certain Other taxes and the Prevention of Tax Evasion and Avoidance (Hereafter the DTA). When entering into force the DTA will replace the existing DTA stemming from 1966.

Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.

 

Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.

 

Persons Covered/Fiscal transparency

Article 1 of the DTA (“Persons Covered”) contains an interesting second paragraph which reads as follows: “For the purposes of this Agreement, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that Contracting State, as the income of a resident of that Contracting State. In no case shall the provisions of this paragraph be construed so as to restrict in any way a Contracting State’s right to tax the residents of that Contracting State. For the purposes of this paragraph, the term “fiscally transparent” means situations where, under the tax law of a Contracting State, income, or part thereof, of an entity or arrangement is not taxed at the level of the entity or arrangement but at the level of the persons who have an interest in that entity or arrangement.”

 

Taxes covered

According to Article 2, Paragraph 1 of the DTA (“Taxes Covered”) the DTA shall apply to the following taxes:

(a)   in the case of Japan:

(i)              the income tax;

(ii)             the corporation tax;

(iii)            the special income tax for reconstruction;

(iv)            the local corporation tax;

(v)              the local inhabitant taxes; and

(vi)             the enterprise tax

(b)   in the case of the Federal Republic of Germany:

(i)              the income tax (Einkommensteuer);

(ii)             the corporate income tax (Körperschaftsteuer);

(iii)            the trade tax (Gewerbesteuer); and

(iv)            the solidarity surcharge (Solidaritätszuschlag)

 

Article 2, Paragraph 2 of the DTA subsequently arranges that the DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Agreement in addition to, or in place of, those referred to in paragraph 1.

 

Permanent establishment 

Paragraph 3 of Article 5 of the DTA (“Permanent Establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

 

Associated enterprises 

Article 9, Paragraph 2 of the DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.

 

Article 9, Paragraph 2 of the DTA contains a statute of limitations clause which reads as follows: “Notwithstanding the provisions of paragraph 1, a Contracting State shall not change the profits of an enterprise of that Contracting State in the circumstances referred to in that paragraph after ten years from the end of the taxable year in which the profits that would be subject to such change would, but for the conditions referred to in that paragraph, have accrued to that enterprise. The provisions of this paragraph shall not apply in the case of fraud or wilful default or when the competent authority of a Contracting State notifies within that ten-year period the competent authority of the other Contracting State of the enterprise of that other Contracting State whose tax liability to that other Contracting State may be directly affected by the taxation provided for in paragraph 1 on an enterprise of the firstmentioned Contracting State by that Contracting State.”

 

Dividends

Paragraphs 2 and 3 from Article 10 of the DTA (“Dividends”) contain provisions that maximize the dividend withholding tax  a Source State is allowed to withhold over dividend distributions.

 

Based on Article 10, Paragraph 3 a Source State is not allowed to withhold dividend withholding tax over a dividend distribution if the beneficial owner of the dividends is a resident of the other Contracting State and is a company (other than a partnership) that has owned directly, for the period of eighteen months ending on the date on which entitlement to the dividends is determined, at least 25 per cent of the voting shares of the company paying the dividends.

 

If the beneficial owner of the dividends is a resident of the other Contracting State, Pargaraph 2 of Article 10 maximizes the dividend withholding tax that a Source State is allowed to withhold over a dividend distribution to:

·        5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) that has owned directly, for the period of six months ending on the date on which entitlement to the dividends is determined, at least 10 per cent of the voting shares of the company paying the dividends;

·        15 per cent of the gross amount of the dividends in all other cases.

 

Interest

Based on Article 11 of the DTA (“Interest”) a Source State is not allowed to withhold withholding tax over interest payments.

 

Royalties

Based on Article 12 of the DTA (“Royalties”) a Source State is not allowed to withhold withholding tax over interest payments.

 

Capital Gains

With respect to capital gains Paragraph 1 of Article 13 of the DTA (“Capital Gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other Contracting State.

 

Paragraph 2 of Article 13 of the DTA subsequently arranges that Gains derived by a resident of a Contracting State from the alienation of shares or interests in a company, partnership or trust deriving at least 50 per cent of the value of its property directly or indirectly from immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other Contracting State.

 

Other

The DTA furthermore includes articles containing provisions regarding Entitlement of Benefits (Article 21), a Mutual Agreement Procedure (Article 24 of the DTA), an article on the Exchange of Information (Article 25 of the DTA) and an article regarding the Assistance in the Collection of Taxes (Article 26 of the DTA).

 

Click on the language of your choice to be forwarded to the text of the DTA in that language as available on the website of the Japanese Ministry of Finance, which will open in a new window. (English or Japanese)

 

Click here to be forwarded to the German version of the DTA as available on the website of the German Ministry of Finance.

 

Are you looking for an other DTA? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.

 

 

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