Signing of New Tax Convention with the Kingdom of Denmark
October 11, 2017
1 On October 11, the Convention between Japan and the Kingdom of Denmark for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (Text(PDF)) was signed in Tokyo by Mr.Taro Kono, Minister for Foreign Affairs of Japan and Mr. Anders Samuelsen, Minister for Foreign Affairs of the Kingdom of Denmark.
2 This Convention wholly amends the existing Convention, which entered into force in 1968, by amending the provisions concerning taxation on business profits, expanding the extent of reduction of taxation on investment income, introducing measures for prevention of abuse of this Convention, arbitration proceeding in mutual agreement procedure and assistance in the collection of tax claims, and reinforcing the exchange of information concerning tax matters. It is expected that, while eliminating double taxation and preventing international tax evasion and tax avoidance, this Convention promotes further mutual investments and economic exchanges between the two countries.
3 The following are key points of the new Convention.
(1) Taxation on Business Profits
Where an enterprise of one of the two countries has in the other country a permanent establishment (such as a branch) through which the enterprise carries on business, only the profits attributable to the permanent establishment may be taxed in that other country. The profits attributable to a permanent establishment will be calculated based on comprehensively recognized internal dealings between its head office and branches and strictly following the arm’s length principle.
(2) Further Reduction of Taxation on Investment Income
Taxation on investment income (dividends, interest and royalties) in the source country is further limited to the maximum rates or exempted as follows:
Existing Convention New Convention Dividends 10% (Dividends paid by a company to another company which holds at least 25% of voting shares over for 12 months of the former)
Exempted (Dividends paid by a company in Japan to a company which holds at least 10% of voting power for 6 months of that company in Japan)
Exempted (Dividends paid by a company in Denmark which holds at least 10% of the capital for 6 months of that company in Denmark)
Exempted (beneficially owned by pension funds)
Interest 10% Exempted Royalties 10% Exempted
(3) Prevention of Abuse of the Convention
In order to prevent abuse of benefits under this Convention, it is provided that only residents who satisfy specified conditions. In addition, any benefit under this Convention will not be granted if it is reasonable to conclude that obtaining such a benefit was one of the principal purposes of any transaction, or if the income is attributable to a permanent establishment in a third country and does not satisfy specified conditions.
(4) Arbitration Proceeding in Mutual Agreement Procedure
Taxation not in accordance with the provisions of this Convention may be resolved by mutual agreement between the tax authorities of the two countries. In addition, where a dispute over a taxation not in accordance with the provisions of this Convention has not been resolved through the consultation between the tax authorities of the two countries within two years, the unresolved issue shall be submitted to arbitration and resolved pursuant to a decision of an arbitration panel composed of third parties.
(5) Exchange of Information and Assistance in the Collection of Tax Claims
In order to effectively prevent international tax evasion and tax avoidance, the scope of cases and taxes subject to the exchange of information concerning tax matters is expanded and the mutual assistance in the collection of tax claims between the two countries is introduced.
4 After the approval in accordance with the domestic procedures in each of the two countries (e.g. in the case of Japan, approval by the Diet is necessary), diplomatic notes indicating such approval are to be exchanged. The new Convention will enter into force on the thirtieth day after the date of exchange of such diplomatic notes and will have effect:
(1) with respect to taxes levied on the basis of a taxable year, for taxes for any taxable years beginning on or after January 1 in the calendar year next following that in which the new Convention enters into force; and
(2) with respect to taxes levied not on the basis of a taxable year, for taxes levied on or after January 1 in the calendar year next following that in which the new Convention enters into force.
5 The provisions concerning the exchange of information and assistance in the collection of taxes have effect from the date of entry into force of this new Convention without regard to the date on which the taxes are levied or the taxable year to which the taxes relate.
6 The provisions concerning the arbitration will be applicable:
(1) with respect to cases presented pursuant to the provisions concerning the mutual agreement procedure on or after the date agreed between the Governments of the Contracting States through exchange of diplomatic notes; and
(2) with respect to cases presented pursuant to the provisions concerning the mutual agreement procedure before that date. In this case, the unresolved issues shall not be submitted to arbitration within two years from the date of this new Convention.