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International Tax Newsletter - Summer 2011 - JAPAN: Recent Tax Treaty Reforms

As of April 2011, there are 48 concluded tax treaties between 59 countries and Japan. Recent new tax treaties include those with Netherlands and Hong Kong.

REDUCTION OR EXEMPTION OF WITHHOLDING TAX RATE ON INVESTMENT INCOME

To encourage mutual investment between the two countries, most of the new treaties reduce or eliminate withholding tax on investment income – dividends, interest and royalties – and introduce measures against treaty abuse.

LIMITATION ON BENEFITS

New treaties tend to include comprehensive limitations on treaty benefits to qualified residents (individuals, specified government authorities, listed companies and their subsidiaries, etc.). Even if a resident is not a qualified person/entity, the benefits may be available if the resident meets specific tests (derivative beneficiary test, active business activity test, etc.).

ARBITRATION RULES

The new Japan/Netherlands tax treaty introduces arbitration rules for mutual agreement procedures to mitigate double taxation for the first time in Japan.Moreover, the Japan/Hong Kong tax treaty introduces so-called second arbitration rules.

Generally tax treaties prescribe that the competent authorities of the two countries shall endeavour to resolve a case of double taxation of the same item by mutual agreement, but there is no duty to reach an agreement and no right for tax payers to join the discussion.

This arbitration process is intended to serve as a supplemental tool available only if the competent authorities are unable to reach an agreement to resolve a particular case within two years from the date the taxpayer presents the case for review. It should be noted that the two countries must abide by the decision of the arbitration panel, which consists of three independent arbitrators with expertise or experience in international tax matters, except where the taxpayer does not accept the decision.

International Tax Newsletter - Summer 2011

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