On January 21, 2016 the Government of Japan and the Government of the Republic of Chile 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 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.
Taxes covered
Based on Article 2, Paragraph 1 of the DTA (“TAXES COVERED”), the existing taxes to which the 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 Chile:
the taxes imposed under the Income Tax Act, “Ley sobre Impuesto a la Renta”
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 Convention in addition to, or in place of, the existing taxes.
Permanent establishment
Article 5, Paragraph 3 of the DTA (“PERMANENT ESTABLISHMENT”) arranges that the term “permanent establishment” shall also include:
(a) a building site, a construction or installation project or the supervisory activities in connection therewith, but only if such building site, project or activities last more than six months; and
(b) the furnishing of services, including consultancy services, by an enterprise through employees or other individuals engaged by the enterprise for such purpose but only if activities of that nature continue within a Contracting State for a period or periods aggregating more than 183 days within any twelve month period commencing or ending in the taxable year concerned.
The duration of activities under subparagraphs (a) and (b) shall be determined by aggregating the periods during which activities are carried on in a Contracting State by associated enterprises, provided that the activities of such an associated enterprise in that Contracting State are connected with the activities carried on in that Contracting State by its associated enterprises. The period during which two or more associated enterprises are carrying on concurrent activities shall be counted only once for the purpose of determining the duration of activities. An enterprise shall be deemed to be associated with another enterprise if one participates directly or indirectly in the management, control or capital of the other, or the same person or persons participate directly or indirectly in the management, control or capital of both enterprises.
Article 5 of the DTA also contains a Paragraph 5 which arranges that the provisions of Article 5, Paragraph 4 do not apply in certain conditions. Paragraph 4 is the Paragraph describing situations that the term “permanent establishment” shall be deemed not to include. Article 5, Paragraph 5 of the DTA reads as follows:
“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 the 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 the closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation.”
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 situated in the other Contracting State may be taxed in that other Contracting State.
With respect to immovable property Article 13, Paragraph 4 subsequently arranges a.o. that gains derived by a resident of a Contracting State from the alienation of shares, comparable interests or other rights may be taxed in the other Contracting State if at any time during the 365 days preceding such alienation, such shares, comparable interests or other rights derived 50 per cent or more of their value, directly or indirectly, from immovable property situated in that other Contracting State.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“ASSOCIATED ENTERPRISES”) contains a so-called appropriate adjustment clause.
Article 9, Paragraph 3 of the DTA subsequently contains a statute of limitation clause which reads as follows:
“A Contracting State shall not change the profits of an enterprise in the circumstances referred to in paragraph 1 after the expiry of the time limits provided in the domestic law of that Contracting State and, in any case, after ten years from the end of the taxable year in which the profits that would be subject to such change would, but for the conditions referred to in paragraph 1, 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 dividend distributions as follows:
(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company that has owned directly, for the period of six months ending on the date on which entitlement to the dividends is determined, at least 25 per cent of the voting power in the company paying the dividends; or
(b) 15 per cent of the gross amount of the dividends in all other cases.
Interest
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 that a Source State is a allowed to withhold over interest to:
(a) 4 per cent of the gross amount of the interest if the beneficial owner of the interest is either:
(i) a bank;
(ii) an insurance company;
(iii) an enterprise substantially deriving its gross income from the active and regular conduct of a lending or finance business involving transactions with unrelated persons, where the enterprise is unrelated to the payer of the interest. For the purposes of this clause, the term “lending or finance business” includes the business of issuing letters of credit, providing guarantees or providing credit card services;
(iv) an enterprise that sold machinery or equipment, where the interest is paid with respect to indebtedness arising as part of the sale on credit of such machinery or equipment; or
(v) any other enterprise, provided that in the three taxable years preceding the taxable year in which the interest is paid, the enterprise derives more than 50 per cent of its liabilities from the issuance of bonds in the financial markets or from taking deposits at interest, and more than 50 per cent of the assets of the enterprise consist of debt-claims against unrelated persons;
(b) 10 per cent of the gross amount of the interest in all other cases.
In this respect it should however be noted that Article 11, Paragraph 3 of the DTA arranges that for a period of two years from the date on which the provisions of paragraph 2 of this Article shall be applicable in accordance with the provisions of Article 29, Paragraph 2 (“ENTRY INTO FORCE”) the rate of 15 per cent shall apply in place of the rate provided in Article 11, Paragraph 2, sub b.
Royalties
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 that a Source State is a allowed to withhold over royalties to:
(a) 2 per cent of the gross amount of the royalties for the use of, or the right to use, industrial, commercial or scientific equipment;
(b) 10 per cent of the gross amount of the royalties in all other cases.
Capital gains
Article 13 of the DTA (“CAPITAL GAINS”) contains an interesting Paragraph 4, which reads as follows:
(a) Gains derived by a resident of a Contracting State from the alienation of shares, comparable interests or other rights may be taxed in the other Contracting State if:
(i) the alienator at any time during the 365 days preceding such alienation owned, directly or indirectly, shares, comparable interests or other rights representing 20 per cent or more of the capital of a company that is a resident of that other Contracting State; or
(ii) at any time during the 365 days preceding such alienation, such shares, comparable interests or other rights derived 50 per cent or more of their value, directly or indirectly, from immovable property situated in that other Contracting State.
(b) Any other gains derived by a resident of a Contracting State from the alienation of shares, comparable interests or other rights representing the capital of a company that is a resident of the other Contracting State may also be taxed in that other Contracting State but the tax so charged shall not exceed 16 per cent of the amount of the gains.
(c) Subject to the provisions of clause (ii) of subparagraph (a), gains derived by a pension fund that is a resident of a Contracting State from the alienation of shares, comparable interests or other rights referred to in subparagraphs (a) and (b) shall be taxable only in that Contracting State.
Other
Furthermore the DTA contains a.o. provisions regarding Limitation of Relief (Article 22), a Mutual Agreement Procedure (Article 25) and regarding the Exchange of Information (Article 26).
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, which will open in a new window (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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