On August 30, 2017 the Government of Japan and the Government of Estonia signed the Convention between Japan and the Republic of Estonia 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.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
The Pre-amble to the DTA reads as follows:
“Japan and the Republic of Estonia,
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 treatyshopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States),
Have agreed as follows:”
Based on Article 2, Paragraph 1 of the DTA (“TAXES COVERED”), the existing taxes to which this Convention shall apply are:
(a) in 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
(b) in Estonia, the income tax.
Article 2, Paragraph 2 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 DTA in addition to, or in place of, the existing taxes.
Article 4, Paragraph 3 of the 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 this Convention, 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 Convention.
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 5 subsequently 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 one or more of the closely related enterprises carry on business activities at the same place or at one or more other places in the same Contracting State and:
(a) that place or one of those other places constitutes a permanent establishment for the enterprise or one or more of the closely related enterprises under the provisions of this Article; or
(b) the overall activity resulting from the combination of the activities carried on by the two or more enterprises at the same place, or by the same enterprise or one or more of the closely related enterprises at the different places, is not of a preparatory or auxiliary character,
provided that the business activities carried on by the two or more enterprises at the same place, or by the same enterprise or one or more of the closely related enterprises at the different places, constitute complementary functions that are part of a cohesive business operation.
Article 5, Paragraph 8 of the DTA arranges that for the purposes of the DTA, a person or enterprise is closely related to a person or 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 a person or 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 persons or enterprises.
Article 7, Paragraph 3 of the DTA (“BUSINESS PROFITS”) contains a so-called appropriate adjustment clause that is specifically meant for situations in which a tax authority adjusts the profits that are attributed to a permanent establishment.
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 4 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, trust or investment fund, 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 referred to in Article 6 and 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 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.
Article 9, Paragraph 2 of the DTA (“ASSOCIATED ENTERPRISES”) contains a so-called appropriate adjustment clause.
Article 9, Paragraph 3 of the DTA contains regulations regarding the applicability of statute of limitation rules.
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 the Source State is not allowed to withhold dividend withholding taxes in case the shareholder has a qualifying shareholding.
Article 10, Paragraph 5 arranges that the provisions of Paragraph 3 shall not apply in the case of dividends which are deductible in computing the taxable income of the company paying the dividends in the Contracting State of which that company is a resident.
If the beneficial owner of the interest is a resident of the other Contracting State, Article 11, Paragraph 2 of the DTA (“INTEREST”) maximizes the withholding tax a Source State is allowed to withhold over interest to 10 per cent of the gross amount of the interest.
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 2 of the DTA (“ROYALTIES”) maximizes the withholding tax a Source State is allowed to withhold over the royalties to 5 per cent of the gross amount of the royalties.
The DTA contains an article that contains specific regulations regarding the treatment of silent partnerships (and its partners). These regulations are laid down in Article 20 of the DTA (“SILENT PARTNERSHIP”). Article 20 arranges that Notwithstanding any other provisions of this Convention, any income and gains derived by a silent partner in respect of a silent partnership (in the case of Japan, Tokumei Kumiai) 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.
Limitation of benefits
Article 22 of the DTA (“ENTITLEMENT TO BENEFITS”) contains a so-called limitation of benefits clause.
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 25), the Exchange of Information (Article 26) and regarding the Assistance in the Collection of Taxes (Article 27).
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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