On January 18, 2017 the Japanese Ministry of Finance issued a press release announcing that on that same date Japan and the Republic of Latvia 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.

 

Pre-amble

The pre-amble contains the following paragraph: “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 States)”.

 

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 Latvia:

(i)   the enterprise income tax; and

(ii)  the personal income tax.

 

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.

 

Residency

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 or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months. For the purpose of determining whether the twelve month period referred to in the first sentence of this paragraph has been exceeded, where:

(a)  an enterprise of a Contracting State carries on activities in the other Contracting State at a place that constitutes a building site or construction or installation project and these activities are carried on during one or more periods of time that, in the aggregate, exceed 30 days without exceeding twelve months, and

(b)  connected activities are carried on at the same building site or construction or installation project during different periods of time, each exceeding 30 days, by one or more enterprises closely related to the first-mentioned enterprise,

these different periods of time shall be added to the period of time during which the first-mentioned enterprise has carried on activities at that building site or construction or installation project.

 

With respect to the Paragraph containing provisions regarding activities with a preparatory or auxiliary character (Article 5, Paragraph 4 of the DTA) Article 5, Paragraph 5 of the DTA arranges that 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.

 

Article 5, Paragraph 6 arranges that notwithstanding the provisions of paragraphs 1 and 2 but subject to the provisions of paragraph 7, where a person is acting in a Contracting State on behalf of an enterprise and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are:

(a)  in the name of the enterprise; or

(b)  for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or

(c)  for the provision of services by that enterprise,

that enterprise shall be deemed to have a permanent establishment in that Contracting State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

 

Article 5, Parargraph 7 subsequently arranges that Article 6, Paragraph 6 shall not apply where the person acting in a Contracting State on behalf of an enterprise of the other Contracting State carries on business in the firstmentioned Contracting State as an independent agent and acts for the enterprise in the ordinary course of that business. Where, however, a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent within the meaning of this paragraph with respect to any such enterprise.

 

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 (“ALIENATION OF PROPERTY”) arranges that income or 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 4 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 7 of Article 22 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 limitation clause which reads as follow: “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 and Paragrah 3 of the DTA (“DIVIDENDS”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:

1)   0 per cent of the gross amount of the dividends if the beneficial owner is a person, other than an individual;

2)   10 per cent of the gross amount of the dividend in all other cases.

 

Article 10, Paragraph 8 of the DTA arranges that where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other Contracting State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other Contracting State.

 

Interest

If the beneficial owner of the interest is a resident of the other Contracting State, Article 11, Paragraph 2 and 3 of the DTA (“INTEREST”) maximizes the withholding tax a Source State is allowed to:

1)   0 per cent of the gross amount of the interest if the beneficial owner is a person, other than an individual (Article 11, Paragraph 3); and

2)   10 per cent of the gross amount of the interest in all other cases (Article 11, Paragraph 2).

 

Article 11, Paragraph 4 of the DTA subsequently 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 2 of the DTA (“ROYALTIES”) arranges that a Source State is not allowed to withhold withholding tax over such royalties.

 

Silent Partnership

With respect to income and gains derived by a silent partner through the use of a silent partnership Article 22 of the DTA (“SILENT PARTNERSHIP”) arranges that notwithstanding any other provisions of the DTA, any income and gains derived by a silent partner in respect of a silent partnership (in the case of Japan, Tokumei Kumiai) contract or another similar contract may be taxed in the Contracting State in which such income and gains arise and according to the laws of that Contracting State.

 

Entitlement to Benefits

Article 22 of the DTA (“ENTITLEMENT TO BENEFITS”) contains a so-called Limitation of Benefits clause.

 

Other

Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 25) regarding the Exchange of Information (Article 26) and regarding the Assistance in the Collection of Taxes (Article 27).

 

Click here to be forwarded to the text of the DTA as available on the website of the Japanese Ministry of Finance (or here to be forwarded to the Japanese version of the DTA).

 

Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.

 


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