Summary of the Tax Treaty in Japan

A Tax Treaty

A tax treaty is a treaty relating to taxation whose main purpose is to contribute to the promotion of a sound investment-economic exchange between the two countries through the adjustment of double taxation, the treatment of tax evasion and the avoidance of taxes.

Tax treaties include the OECD (Organization for Economic Co-operation and Development) model tax treaties centered on OECD member countries. These are used as templates for concluding tax treaties mainly in OECD member countries. Japan has also entered into tax treaties with other countries by adopting rules in line with this.

(1) Main contents of OECD model tax treaty
① Adjustment of double taxation
One of the main purposes of the tax treaty is the elimination of double taxation. The tax treaty establishes the range of taxable income of the source country (the country from which the income is generated). For example, business income is taxed only on income earned from branch activities. In addition, investment income (dividends, interest and fees) is capped at the tax rates imposed in each country and region.

② Dealing with tax evasion and tax avoidance
This is also one of the purposes of the tax treaty. There is an exchange of information, including bank secrets, regarding taxpayers between the tax authorities of each country. Generally speaking, there is a foreign tax deduction method where it deducts the tax levied in the source country from the tax in the home country, or alternatively, double taxation is eliminated by income exemption where it exempts the income generated in the source country from taxation. Japan adopts the foreign tax deduction method.

Merits of tax treaty

The following are advantages of foreign companies and other companies that have advanced in Japan using tax treaties.

(1) Exclusion from double taxation
First, there is the point in which foreign companies entering Japan can avoid double taxation on the profits from their investment and business in Japan. Since Japan’s statutory effective tax rate is never lower than foreign countries, double taxation will significantly reduce the profits left from investment and business.

(2) Arbitration relating to unfair handling of taxes
If a foreign company receives an improper tax treatment in Japan, one of the merits is that it can file a petition with a consulting organization established between the two countries.

(3) Reduction of taxation on dividends and interest
Another advantage is that foreign-funded companies can reduce the taxes on the dividends received and interest earned in Japan.

Procedures for tax treaty application

When paying interest, dividends, royalties, etc. from Japan to overseas, in principle, a 20.42% withholding income tax will be imposed, and the payer will be required to withhold said tax. Meanwhile, applying the tax treaty may allow for reduction or exemption of withholding taxes on payments made overseas.

In order to apply for reduction or exemption of withholding income tax, you need to submit a “Notification on Tax Treaty” to the person in charge of the tax office with jurisdiction on the payer’s tax payment location on the day before the payment of the eligible income.

Countries/regions that Japan has signed tax treaties with

According to the Ministry of Finance website, Japan has signed 68 treaties, etc. with 110 countries and regions as of June 1, 2017 (http://www.mof.go.jp/tax_policy/summary/international/182.pdf). Also, those countries and regions with ※ are those that Japan has concluded with in treaties (the so-called information exchange agreement) whose main contents are exchange of information on taxes.

(1) North and Central Americas (18 countries / regions)
United States, Canada, Chile, Brazil, Mexico, Cayman Islands (※), British Virgin Islands (※), Panama (※), Bahamas (※), Bermuda (※)

Executive Cooperation Treaty only

Argentina, Uruguay, Costa Rica, Colombia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Barbados, Belize

(2) Europe (39 countries / regions)
Ireland, Hungary, United Kingdom, Finland, Italy, France, Austria, Bulgaria, Netherlands, Belgium, Switzerland, Portugal, Sweden, Poland, Spain, Luxembourg, Slovakia, Romania, Czech Republic, Guernsey (※), Denmark, Jersey (※), Germany, Isle of Man (※), Norway, Liechtenstein(※)

(Executive Cooperation Treaty only)
Iceland, San Marino, Albania, Slovenia, Andorra, Malta, Estonia, Monaco, Cyprus, Latvia, Greece, Lithuania, Croatia

(3) Russia and NIS countries (12 countries / regions)
Azerbaijan, Uzbekistan, Georgia, Belarus, Armenia, Kazakhstan, Tajikistan, Moldova, Ukraine, Kyrgyzstan, Turkmenistan, Russia

(4) Asia, Oceania (23 countries / regions)
India, Korea, Thailand, Pakistan, Philippines, Hong Kong, Macao (※), Indonesia, Singapore, China, Bangladesh, Brunei, Malaysia, Australia, Sri Lanka, New Zealand, Fiji, Vietnam, Samoa (※), Taiwan

(Executive Cooperation Treaty only)
Nauru, Niue, Marshall Islands

As for Taiwan, because a formal tax treaty cannot be concluded due to the relationship between Japan and China, a framework equivalent to a tax treaty has been constructed as a whole by the private sector agreement between the public interest incorporated association Foundation (Japan side) and the Ato Relations Association (Taiwan side) and the law to carry out the contents in Japan.

(5) Middle East (7 countries / regions)
United Arab Emirates, Kuwait, Israel, Saudi Arabia, Oman, Turkey, Qatar

(6) Africa (11 countries / regions)
Egypt, South Africa, Zambia

(Executive Cooperation Treaty only)
Uganda, Senegal, Ghana, Tunisia, Cameroon, Nigeria, Seychelles, Mauritius

Reference
List of tax treaty member countries (Ministry of Finance website)
https://www.mof.go.jp/tax_policy/summary/international/182.pdf