On February 19, 2024 the Japanese Ministry of finance issued a press release announcing that on that same date the Government of Japan and the Government of Ukraine signed the “Convention between the Government of Japan and the Government of Ukraine for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance".

This newly signed Convention wholly amends the existing Convention (Convention between the Government of Japan and the Government of the Union of Soviet Socialist Republics (USSR) for the Avoidance of Double Taxation with respect to Taxes on Income), which entered into force in 1986, by revising the taxation on business profits and investment income, introducing measures for prevention of abuse of this Convention, arbitration proceedings in mutual agreement procedures and assistance in the collection of tax claims, and reinforcing the exchange of information concerning tax matters. This newly signed Convention will not affect the existing Convention for as far as that is applicable between Japan and former USSR countries other than Ukraine.

After the completion of the domestic procedures in each of the two countries, each of the two countries shall send through diplomatic channels to the other country the notification confirming the completion of its internal procedures. This Convention will enter into force on the thirtieth day after the date of receipt of the latter notification and will have effect:

(a)   in Japan:

1. with respect to taxes levied on the basis of a taxable year, for taxes for any taxable years beginning on or after 1 January in the calendar year next following that in which this Convention enters into force;
2. with respect to taxes levied not on the basis of a taxable year, for taxes levied on or after 1 January in the calendar year next following that in which this Convention enters into force;

(b)   in Ukraine:

1. with respect to taxes withheld at source, for amounts paid on or after 1 January in the calendar year next following that in which this Convention enters into force;
2. with respect to other taxes, for any taxable year beginning on or after 1 January in the calendar year next following that in which this Convention enters into force.

Key Points of New Tax Convention with Ukraine

1.   Taxation on Business Profits

Where an enterprise of one of the two countries has in the other country a permanent establishment (such as a branch) through which the enterprise carries on business, only the profits attributable to the permanent establishment may be taxed in that other country. The profits attributable to a permanent establishment will be calculated by comprehensively recognising internal dealings between its head office and branches and by strictly applying the arm’s length principle.

2.   Taxation on Investment Income

Taxation on investment income (dividends, interest and royalties) in the source country will be subjected to the maximum rates or exempted as follows:

3.   Mutual Agreement Procedure and Arbitration Proceedings

Taxation not in accordance with the provisions of the Convention may be resolved by mutual agreement between the tax authorities of the two countries. In addition, where such taxation has not been resolved through the consultation between the tax authorities of the two countries within two years, the unresolved issue will be resolved pursuant to a decision of an arbitration panel composed of third parties.

4.  Exchange of Information and Assistance in Collection of Tax Claims

In order to effectively prevent international tax evasion and tax avoidance, the exchange of information concerning tax matters and the mutual assistance in the collection of tax claims between the two countries are introduced.

5.   Prevention of Abuse of the Convention

In order to prevent abuse of benefits under the Convention, any benefit under the Convention will not be granted if the income is attributable to a permanent establishment in a third country and the tax on the income in the third country is less than a certain amount of tax, or if it is reasonable to conclude that obtaining such a benefit was one of the principal purposes of any transaction.

The full English text of the Convention between the Government of Japan and the Government of Ukraine for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance as signed on February 19, 2024 can be found here on the website of the Japanese Ministry of Finance.

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