On July 14, 2017 the Japanese Ministry of Finance issued a press release announcing that on July 13, 2017 the Government of Japan and the Government of the Republic of Lithuania signed a Convention between Japan and the Republic of Lithuania 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.
The preamble to the DTA reads as follows:
“Japan and the Republic of Lithuania,
Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,
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)…”
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 Lithuania:
(i) the profit 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.
Article 4, Paragraph 3 of the DTA (“RESIDENT”) arranges that where by reason of the provisions of Article 4, 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 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.
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 and that activities carried on offshore in a Contracting State in connection with the exploration or exploitation of natural resources situated in that Contracting State constitute a permanent establishment only if such activities are carried on for a period or periods exceeding in the aggregate 30 days in any twelve month period commencing or ending in the taxable year concerned.
Article 5, Paragraph 5 arranges that Article 5, Paragraph 4 (activities with 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.
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 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 such shares or comparable interests are traded on a recognised stock exchange specified in subparagraph (b) of paragraph 7 of Article 23 and the resident and persons related to that resident own in the aggregate 10 per cent or less of the class of such shares or comparable interests.
Article 9, Paragraph 2 of the DTA (“ASSOCIATED ENTERPRISES”) contains a so-called appropriate adjustment clause.
Article 9, Paragraph 3 contains a so-called statute of limitation 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 the expiry of the time limits provided for in the laws 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 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.”
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.
Article 10, Paragraph 3 subsequently arranges that notwithstanding the provisions of paragraph 2, dividends paid by a company which is a resident of a Contracting State and beneficially owned by a person, other than an individual, who is a resident of the other Contracting State shall be taxable only in that other Contracting State. In this respect Article 10, Paragraph 5 subsequently arranges that the provisions of Paragraph 3 shall not apply in the case of dividends which are deductible in computing the taxable income of the company paying the dividends in the Contracting State of which the company is a resident.
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 subsequently arranges that notwithstanding the provisions of Article 11, Paragraph 2, interest arising in a Contracting State and beneficially owned by a person, other than an individual, who is a resident of the other Contracting State shall be taxable only in that other Contracting State. In this respect Article 11, Paragraph 4 subsequently arranges that the provisions of Article 11, Paragraph 3 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, or any other interest similar to such interest.
With respect to interest Article 12, Paragraph 1 of the DTA (“ROYALTIES”) arranges that royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.
Entitlement to benefits
Article 23 of the DTA (“ENTITLEMENT TO BENEFITS”) contains provisions regarding a limitation on benefits.
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 26), regarding the Exchange of Information (Article 27) and regarding the assistance in the collection of taxes (Article 28).
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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