Signing of the Tax Agreement between Japan and Croatia
October 19, 2018
1. On October 19, 2018, “the Agreement between Japan and the Republic of Croatia for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance” (hereinafter referred to as the Agreement) (English (PDF) / Japanese (PDF)) was signed in Zagreb by Mr. Kenji Yamada, Parliamentary Vice-Ministers for Foreign Affairs of Japan and Dr. Zdravko Marić，Minister of Finance of the Republic of Croatia.
2. For the purpose of eliminating double taxation arising between the two countries, this Agreement clarifies the scope of taxable income in the two countries. In addition, this Agreement will enable the tax authorities of the two countries to consult each other on taxation not in accordance with the provisions of this Agreement, to exchange information concerning tax matters and to mutually lend assistance in the collection of tax claims. It is expected that, while eliminating double taxation and preventing international tax evasion and tax avoidance, this Agreement promotes further mutual investments and economic exchanges between the two countries.
3. The following are the key points of the Agreement.
(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 by comprehensively recognizing internal dealings between its head office and branches and by strictly applying the arm’s length principle.
(2) Taxation on Investment Income
Taxation on investment income (dividends, interest and royalties) in the source country will be subjected to the maximum rates or exempted as follows:
Dividends Exempted (holding at least 25% of voting power for 365 days)
Interest Exempted (received by the Governments, etc.)
(3) Prevention of Abuse of the Agreement
In order to prevent abuse of benefits under this Agreement, in principle, qualified persons who satisfy specified conditions may exclusively be entitled to the exemption from tax on dividends. In addition, any benefit under this Agreement 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) Mutual Agreement Procedure
Taxation not in accordance with the provisions of this Agreement may be resolved by mutual agreement between the tax authorities of the two countries.
(5) Exchange of Information and Assistance in the Collection of Tax Claims
In order to effectively prevent international tax evasion and tax avoidance, the exchange of information concerning tax matters and the mutual assistance in the collection of tax claims between the two countries are introduced.
4. After the completion of the necessary domestic procedures in each of the two countries (in the case of Japan, approval by the Diet is necessary), each of the two countries shall send through diplomatic channels to the other country the notification confirming the completion of its internal procedures. This Agreement will enter into force on the thirtieth day after the date of receipt of the latter notification and will have effect:
(a) 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 this Agreement enters into force; and
(b) 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 this Agreement enters into force.
(c) The provisions concerning the exchange of information and the assistance in the collection of taxes have effect from the date of entry into force of this Agreement without regard to the date on which the taxes are levied or the taxable year to which the taxes relate.