On October 11, 2017 the Japanese Ministry of Finance issued a press release announcing that on that same date the Government of Japan and the Government of the Kingdom of Denmark signed the Convention between Japan and the Kingdom of Denmark for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (Hereafter: the new DTA).
Although the DTA has been signed, it has not entered into force yet. For the new DTA to enter into force, the respective ratification procedures have to have been finalized in both countries. When entering into force the new DTA will replace the new DTA will replace the DTA that is currently in place between Japan and Denmark.
Below we will discuss a selection of provisions included in the new DTA of which we think they might interest our readers.
Pre-amble
The Pre-amble to the new DTA reads as follows:
“Japan and the Kingdom of Denmark,
Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,
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 treaty shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States),
Have agreed as follows:”
Taxes covered
Based on Article 2, Paragraph 1 of the new DTA (“TAXES COVERED”), the existing taxes to which the new DTA shall apply are:
(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; and
(v) the local inhabitant taxes; and
(b) in the case of Denmark:
(i) the corporation income tax to the State;
(ii) the individual income tax to the State;
(iii) the individual municipal income tax;
(iv) taxes imposed under the Hydrocarbon Tax Act;
(v) taxes imposed under the Pension Investment Return Tax Act;
(vi) the church tax;
(vii) the tax on dividends; and
(viii) the tax on royalties.
Article 2, Paragraph 2 subsequently arranges that the new 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 new DTA (“RESIDENT”) arranges that where by reason of the provisions of Article 4, 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 the new DTA, having regard to its place of head or main office, its place of effective management, 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 new DTA.
Permanent establishment
Article 5, Paragraph 3 of the new 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.
Article 5, Paragraph 4 subsequently arranges that an installation or drilling rig or ship used in a Contracting State for the exploration of natural resources situated in that Contracting State shall be deemed to constitute a permanent establishment situated in that Contracting State only if such exploration continues for more than twelve months. For the purpose of determining whether the twelve month period referred to in the first sentence of this paragraph has been exceeded, where:
(a) an enterprise of a Contracting State carries on such exploration in the other Contracting State and such exploration is carried on during one or more periods of time that, in the aggregate, exceed 30 days without exceeding twelve months, and
(b) connected activities are carried on for the same project or operation of such exploration during different periods of time, each exceeding 30 days, by one or more enterprises closely related to the first-mentioned enterprise,
these different periods of time shall be added to the period of time during which the first-mentioned enterprise has carried on such exploration.
With respect to Article 5, Paragraph 5 (the paragraph that arranges that activities of a preparatory or auxiliary nature do constitute a permanent establishment), Article 5, Paragraph 6 arranges that Article 5, Paragraph 5 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 9 of the new DTA subsequently arranges that for the purposes of Article 5 of the new DTA, a person or enterprise 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 or enterprise 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 or enterprise 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 or in the two enterprises.
Article, 7 Paragraph 3 of the new DTA (“BUSINESS PROFITS”) contains a so-called appropriate adjustment clause that specifically applies to permanent establishments.
Immovable property
Article 6, Paragraph 1 of the new DTA (“INCOME FROM IMMOVABLE PROPERTY”) arranges that ncome 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 new 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 4 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, 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 21 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 new DTA (“ASSOCIATED ENTERPRISES”) contains a so-called appropriate adjustment clause.
Article 9, Paragraph 3 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 period 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, Paragraphs 2 of the new DTA (“DIVIDENDS”) maximizes the withholding tax a Source State is allowed to withhold over dividends to 15 per cent of the gross amount of the dividends.
Article 10, Paragraph 3 subsequently arranges that a source state is not allowed to withhold withholding taxes over dividends 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, for the period of six months ending on the date on which entitlement to the dividends is determined, at least 10 per cent of:
(i) in the case where the company paying the dividends is a resident of Japan, the voting power of that company; or
(ii) in the case where the company paying the dividends is a resident of Denmark, the capital of that company; 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.
Interest
If the beneficial owner of the interest is a resident of the other Contracting State, Article 11 of the new DTA (“INTEREST”) arranges that in principle a Source State is not allowed to withhold withholding taxes over interest if the interest is beneficially owned by a resident of the other Contracting State. Article 11, Paragraph 2 however arranges that notwithstanding the provisions of paragraph 1, interest arising in a Contracting State 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 a Contracting State, may be taxed in that Contracting State according to the laws of that Contracting State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12 of the new DTA (“ROYALTIES”) arranges that a Source State is no allowed to withhold withholding taxes over royalties.
Limitation of benefits
Article 21 the new DTA (“ENTITLEMENT TO BENEFITS”) contains regulations regarding the entitlement of benefits.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24) and regarding the Exchange of Information (Article 25) and regarding the Assistance in the Collection of Taxes (Article 26).
Click on the language of your choice to be forwarded to the text of the new DTA in that language as available on the website of the Japanese Ministry of Finance. (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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