On January 31, 2017 the Japanese Ministry of Finance issued a press release announcing that on January 30, 2017 the Government of Japan and the Government of the Republic of Austria signed a new Convention for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (Hereafter: the DTA).
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. When entering into force the DTA will replace the Convention between Japan and the Republic of Austria for the Avoidance of Double Taxation with respect to Taxes on Income which was signed at Vienna on 20 December, 1961.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Pre-amble
The pre-amble contains the following paragraph: “Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treatyshopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States)”.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“TAXES COVERED”), the existing taxes to which the DTA shall apply are:
(a) in the case of Austria:
(i) the income tax; and
(ii) the corporation tax;
(b) 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; and
(v) the local inhabitant taxes
Article 2, Paragraph 4 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 Convention in addition to, or in place of, the existing taxes.
Residency
Article 4, Paragraph 3 of the DTA (“RESIDENT”) arranges that where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of this Convention, having regard to its place of effective management, its place of head or main office, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Convention.
Permanent establishment
Article 5, Paragraph 3 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.
With respect to activities with an auxiliary or preparatory character Article 5, Paragraph 4 arranges that these activities do not constitute a permanent establishment. In this respect Article 5, Paragraph 4 arranges that Paragraph 4 shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting State and
(a) that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of this Article, or
(b) the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character,
provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation.
Article 5, Paragraph 8 subsequently arranges that for the purposes of this Article 5 of the DTA, a person is closely related to an enterprise if, based on all the relevant facts and circumstances, one has control of the other or both are under the control of the same persons or enterprises. In any case, a person shall be considered to be closely related to an enterprise if one possesses directly or indirectly more than 50 per cent of the beneficial interest in the other (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company’s shares or of the beneficial equity interest in the company) or if another person possesses directly or indirectly more than 50 per cent of the beneficial interest (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company’s shares or of the beneficial equity interest in the company) in the person and the enterprise.
Immovable property
Article 6, Paragraph 1 of the DTA (“INCOME FROM IMMOVABLE PROPERTY”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other Contracting State.
With respect to immovable property Article 13, Paragraph 1 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.
Article 13, Paragraph 2 of the DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares of a company or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived at least 50 per cent of their value directly or indirectly from immovable property, as defined in Article 6 of the DTA, situated in that other Contracting State, unless such shares or comparable interests are traded on a recognised stock exchange specified in subparagraph (b) of paragraph 7 of Article 22 of the DTA and the resident and persons related to that resident own in the aggregate 5 per cent or less of the class of such shares or comparable interests.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“ASSOCIATED ENTERPRISES”) contains a so-called appropriate adjustment clause.
Article 9, Paragrap 3 of the DTA contains a so-called statute of limitation 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 subjected 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.”
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“DIVIDENDS”) maximizes the withholding tax a Source State is allowed to withhold over dividends to 10 per cent of the gross amount of the dividends.
Article 10, Paragraph 3 subsequently arranges that notwithstanding the provisions of Article 10, Paragraph 2, dividends paid by a company which is a resident of a Contracting State shall be taxable only in the other Contracting State if the beneficial owner of the dividends is a resident of that other Contracting State and is either:
(a) a company which has owned directly or indirectly, 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 power of the company paying the dividends; or
(b) a pension fund, provided that such dividends are derived from the activities referred to in clause (ii) of subparagraph (l) of Paragraph 1 of Article 3 of the DTA.
Article 10, Paragraph 5 arranges that the provisions of Article 10, Paragraph 3, subparagraph (a) shall not apply in the case of dividends paid by a company which is entitled to a deduction for dividends paid to its beneficiaries in computing its taxable income in the Contracting State of which the company paying the dividends is a resident.
Interest
If the beneficial owner of the interest is a resident of the other Contracting State, Article 11 of the DTA (“INTEREST”) arranges that the Source State is not allowed to withhold withholding taxes over interest payments.
Article 11, Paragraph 2 subsequently arranges that notwithstanding the provisions of Article 11, Paragraph 1,
(a) in the case of Austria, income derived from debtclaims carrying a right to participate in profits, including income derived from profit participating loans and profit participating bonds, may also be taxed in Austria according to the laws of Austria if it arises in Austria; and
(b) in the case of Japan, interest arising in Japan that is determined by reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person, or any other interest similar to such interest arising in Japan, may also be taxed in Japan according to the laws of Japan.
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 2 of the DTA (“ROYALTIES”) arranges that the Source State is not allowed to withhold withholding taxes over royalties.
Silent partnerships
The DTA contains a special article regarding silent partnerships. Article 20 of the DTA (“SILENT PARTNERSHIP”) arranges that notwithstanding any other provisions of the DTA, any income and gains derived by a silent partner in respect of a silent partnership (in the case of Japan, Tokumei Kumiai and, in the case of Austria, Stille Gesellschaft) contract or another similar contract may be taxed in the Contracting State in which such income and gains arise and according to the laws of that Contracting State.
Entitlement to benefits
Article 22 of the DTA (“ENTITLEMENT TO BENEFITS”) contains provisions regarding the Limitation of Benefits.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 25), regarding the Exchange of Information (Article 26) and regarding the assistance in the collection of taxes (Article 27).
Click on the language of your choice to be forwarded to the text of the DTA as available on the website of the Japanese Ministry of Finance in that language. (English or Japanese)
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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