- Reduction or Exemption of Taxes on Investment Income in the Source Country
Taxation on investment income (dividends, interest and royalties) in the source country is reduced or exempted as follows:
Dividends Interest Royalties Current Convention 15% No provision No provision New Convention Exemption (Voting power: at least 10%)
Exemption (governments, banks, etc.)
- Introduction of Provisions for Prevention of Tax Avoidance
Since the scope of exemption from taxes in the source country is significantly expanded, the risk of tax avoidance by abusing the benefits of the Convention will be increased, and therefore, the following provisions are introduced to prevent such cases:
(1) Provisions concerning the limitation on benefits
Persons who are entitled to the benefits of the Convention are limited to those who satisfy certain conditions.
(2) Provisions concerning transactions considered to be abuse of the benefits of the Convention
No benefits of the Convention shall be granted if transactions are considered to be abuse of the benefits of the Convention in light of the purpose of transactions.
- Introduction of Arbitration Procedure for Dispute Resolution between the Tax Authorities
With respect to the mutual agreement procedure concerning the taxation which is not in accordance with the provisions of the Convention, the new Convention introduces the arbitration system to resolve the dispute by the decision of an arbitration panel composed of third parties at the request of a taxpayer in the case where a dispute has not been resolved by the consultation between the tax authorities of the two countries within two years.
- Exchange of Information between the Tax Authorities
The new Convention establishes that the tax authorities of the two countries shall exchange to each other information concerning all national and local taxes of the two countries.
- Introduction of Assistance in the Collection of Taxes between the Tax Authorities
The new Convention establishes that the tax authorities of the two countries shall lend assistance to each other in the collection of delinquent taxes of the other country (with regard to the taxes of Japan, the income tax, the corporation tax, the special income tax for reconstruction, the special corporation tax for reconstruction, the consumption tax, the inheritance tax and the gift tax are covered under the assistance in the collection of taxes).
The new Convention also includes:
(1) Provisions concerning entities differently dealt with in terms of taxation between the two countries;
(2) Provisions concerning the appropriate adjustment for transfer pricing taxation; and
(3) Provisions concerning taxation on income derived by a silent partner in respect of a silent partnership contract.