On September 7, 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 Russian Federation signed a Convention 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. The Convention between the Government of Japan and the Government of the Union of Soviet Socialist Republics for the Avoidance of Double Taxation with respect to Taxes on Income, with Protocol, signed at Tokyo on 18 January, 1986 shall between Japan and Russia cease to be applicable from the date upon which the new DTA applies in respect of the taxes to which the new DTA applies in accordance with the provisions of Article 29, Paragraph 2 of the new DTA (“ENTRY INTO FORCE”).
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:
“The Government of Japan and the Government of the Russian Federation,
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 jurisdictions),
Have agreed as follows:”
Based on Article 2, Paragraph 3 of the new DTA (“TAXES COVERED”), the existing taxes to which the new DTA 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; and
(v) the local inhabitant taxes; and
(b) in the Russian Federation:
(i) the tax on profits of organisations; and
(ii) the tax on income of individuals.
Article 2, Paragraph 4 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 this Convention in addition to, or in place of, the existing taxes.
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.
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 arranges that preparatory activities and activities of an auxiliary nature do not constitute a permanent establishment.
Aaticle 5, Paragraph 5 subsequently arranges that Article 5, 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.
With respect to closely related persons and closely related enterprises, Article 5, Paragraph 8 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 6, Paragraph 1 of the new 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 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 of this Convention 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, 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, as defined in Article 6 of the new 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 6 of Article 21 of the new 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.
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 of this Article, 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.”
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the new DTA (“DIVIDENDS”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which has owned directly at least 15 per cent of the voting power of the company paying the dividends for the period of 365 days ending on the date on which entitlement to the dividends is determined;
(b) 10 per cent of the gross amount of the dividends in all other cases.
Special regulations apply with respect to dividend payments received by qualifying pension funds.
Article 10, Paragraph 6 of the new DTA contains an anti-abuse clause seeing on hybrid mismatches which arranges that the provisions of Article 10, Paragraph 2(a) 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.
With respect to the rights of a source state to withhold withholding taxes over interest Article 11, Paragraph 2 of the new DTA (“INTEREST”) arranges that notwithstanding the provisions of Article 11, Paragraph 1 (which arranges that a source state is not allowed to withhold withholding tax over interest), 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.
Article 12 of the new DTA (“ROYALTIES”) arranges that a source state is not allowed to withhold withholding taxes over royalties.
Limitation of benefits
Article 20 of the new DTA (“ENTITLEMENT TO BENEFITS”) contains regulations regarding the entitlement of benefits.
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24), regarding the Exchange of Information (Article 25) and regarding the assistance in the collection of taxes (Article 26).
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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