On September 30, 2016 the Japanese Ministry of Finance issued a press release announcing that on that same date Japan and the Republic of Slovenia 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 3 of the DTA (“TAXES COVERED”), the existing taxes to which this Convention shall apply are:
(a) in Slovenia:
(i) the tax on income of legal persons; and
(ii) the tax on income of individuals;
(b) 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.
Article 2, Paragraph 4 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.
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 Article 4, Paragraph 1 of the DTA 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.
Permanent establishment
Article 5, Paragraph 3 of the DTA (“PERMANENT ESTABLISHMENT”) arranges that a building site, a construction, assembly or installation project or a supervisory activity connected therewith constitutes a permanent establishment only if such site, project or activity 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 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 relevant class of the shares or comparable interests is traded on a recognised stock exchange and the resident and persons related to that resident own in the aggregate 5 per cent or less of that 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 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.”
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 5 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 5 per cent of the gross amount of the interest.
Article 11, Paragraph 3 of the DTA subsequently arranges that notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be taxable only in the other Contracting State if:
(a) the interest is beneficially owned by the Government of that other Contracting State, a political subdivision or local authority thereof, the central bank thereof or any institution acting for promoting export, investment or development thereof; or
(b) the interest is beneficially owned by a resident of that other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by any institution acting for promoting export, investment or development thereof.
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 a Source State is allowed to withhold over such royalties to 5 per cent of the gross amount of the royalties.
Limitation on Benefits
Article 21 of the DTA (“LIMITATION ON BENEFITS”) reads as follows:
“Notwithstanding the other provisions of this Convention, a benefit under the Convention shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Convention.”
Other
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 Collection of Taxes (Article 26).
The Japanese Ministry of Finance has made the DTA available in both the English and the Japanese version.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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