On October 12, 2016 the Japanese Ministry of Finance issued a press release announcing that on that same date the Governments of Japan and of the Kingdom of Belgium 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. When entering into force the DTA will replace the Convention between Japan and the Kingdom of Belgium for the Avoidance of Double Taxation with respect to Taxes on Income which signed on March 28, 1968, as amended by the Protocol signed at Brussels on November 9, 1988 and the Protocol signed at Brussels on January 26, 2010.
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 this Convention 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 Belgium:
(i) the individual income tax;
(ii) the corporate income tax;
(iii) the income tax on legal entities;
(iv) the income tax on non-residents; and
(v) the withholding tax on immovable property;
including the prepayments and the surcharges on these taxes and prepayments.
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.
Residency
With respect to the residency of a person other than an individual, Article 4, Paragraph 3 of the DTA (“RESIDENT”) arranges that where by reason of the provisions of 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 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 be deemed not to be a resident of either Contracting State for the purposes of Articles 6 to 21 of the DTA.
Permanent establishment
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.
Article 5, Paragraph 5 arranges that Article 5, Paragraph 4 of the DTA (Paragraph 4 relates to activities of a preparatory or auxiliary character) 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 business profits to be attributed to a permanent establishments Article 7, Paragraph 3 of the DTA (“BUSINESS PROFITS”) contains a so-called appropriate adjustment clause.
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 referred to in Article 6 of the DTA and situated in the other Contracting State may be taxed in that other Contracting State.
Article 13, Paragraph 2 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 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 the shares or comparable interests are traded on a recognised stock exchange specified in subparagraph (b) of paragraph 8 of Article 22 of the DTA and the resident and persons related to that resident own in the aggregate 5 per cent or less of the class of the shares or comparable interests.
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 contains a so-called statute of limitations 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.”
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 dividends to 10 per cent of the gross amount of the dividends.
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 a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.
Article 11, Paragraph 3 of the DTA subsequently arranges that notwithstanding the provisions of Article 11, Paragraph 2, interest arising in a Contracting State shall be taxable only in the other Contracting State if it is:
(a) paid by an enterprise of that Contracting State and beneficially owned by an enterprise of that other Contracting State;
(b) beneficially owned by a pension fund that is a resident of that other Contracting State, provided that such interest is derived from the activities referred to in clause (ii) of subparagraph (l) of paragraph 1 of Article 3 of the DTA;
(c) beneficially owned by the Government of that other Contracting State, a political subdivision or local authority thereof, the central bank thereof or any institution wholly owned by that Government or political subdivision or local authority; or
(d) beneficially owned by a resident of that other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by any institution wholly owned by the Government of that other Contracting State or a political subdivision or local authority thereof.
Article 11, paragraph 4 of the DTA arranges that the provisions of Article 11, Paragraph 3 of the DTA shall not apply to interest 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 dividends, partnership distribution or similar payment made by the debtor or a related person.
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 1 of the DTA (“ROYALTIES”) arranges that the Source State is not allowed to withhold withholding taxes over such royalties.
Other
Furthermore the DTA contains a.o. provisions regarding the Entitlement to the Benefits of the DTA (Article 22), regarding a Mutual Agreement Procedure (Article 25), regarding the Exchange of Information (Article 26) and regarding the Assistance in Collection of Taxes (Article 27).
The Japanese Ministry of Finance has made the DTA available in both the English and the Japanese language.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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