Significant decrease in withholding tax rates…
The most striking feature of the new tax treaty is the substantial decrease of the withholding tax rates for dividends, interest and royalty payments.
• The new treaty provides for a full exemption of dividend withholding tax paid to a parent company (i.e. a company directly or indirectly owning at least 10% of the voting power for a period of six months) or a pension fund as defined in the treaty. The standard rate for dividends under the new tax treaty is reduced from 15 % to 10%.
• A brand new and full interest withholding tax exemption is included for intercompany interest payments, interest paid to a pension fund, as well as to certain government-owned entities.
• Royalties benefit under the new tax treaty from a full withholding tax exemption (compared to 10% under the current treaty).
…but only for qualifying tax payers
The significant decrease of withholding tax rates is subject to an ‘entitlement to benefits clause’. According to this provision, only the taxpayers listed below benefit from the favorable withholding rates:
• Qualified persons (e.g. individuals, listed companies, banks, insurance companies, securities dealers, pension funds (subject to conditions) and companies directly or indirectly owning at least 50% of the voting power or other beneficial interests of the aforementioned persons during twelve months);
• Certain equivalent beneficiaries;
• Taxpayers conducting an active business in Japan or Belgium if the dividend, interest or royalty is derived in connection with or incidental to that business; • Headquarters company for a multinational group if certain conditions are met;
• Any other taxpayer if the Belgian or Japanese competent authorities determine that the principal purpose was not to obtain the favorable withholding tax rates.
Definition of permanent establishments aligned with BEPS action 7
The new article 5 on permanent establishments is aligned with the OECD final report on action 7 (preventing the artificial avoidance of PE status) of the Base Erosion and Profit Shifting (BEPS) plan. The main goal of this action is to tackle strategies companies use to avoid having a taxable presence in another jurisdiction. Consequently, under the new article 5 of the tax treaty, doing business in another country may more likely trigger the existence of a taxable permanent establishment (e.g. when setting up a commissionaire structure).
Avoidance of double taxation
Japan will apply the credit method to avoid double taxation. Belgium generally applies the exemption-with-progression method (for individuals) and the exemption method (for corporate entities). A special regime is applicable for Japanese dividends paid to a Belgium resident company. These dividend payments are exempt in Belgium if the Belgian dividends received deduction is applicable. In the event the subject to tax requirement of the Belgium dividends received deduction is not met, the Belgium resident company is nevertheless entitled to a full exemption if the Japanese company paying the dividends effectively carries out an active business in Japan.
Entry into force
The new tax treaty will enter into force 30 days after the latest notification of ratification. The treaty will be applicable in the calendar year following its entry into force. Consequently, if both countries ratify and duly notify the other country before or on 1 December 2016, the treaty will apply as from 1 January 2017. Recent events however have demonstrated that the (Belgian) ratification by all the parliaments concerned is not a straightforward matter. Therefore, we do not expect the treaty to be applicable before 1 January 2018.
It is expected that the new Belgium Japan treaty creates a tax friendly environment for cross-border investments and may stimulate trade and investments between two countries and induce economic growth. The significant decrease in withholding tax rates will greatly lower the applicable taxes and encourage investment. Obviously we will continue to monitor the entry into force of the new tax treaty and we remain available to advise you on the opportunities the new tax treaty creates for your business in Japan (and the Asian region).
For more information, please contact:
Nico DEMEYERE - Counsel (email@example.com)
Thomas AERTGEERTS - Associate (firstname.lastname@example.org)
Tuesday, 25 October 2016
New tax treaty between Belgium and Japan may stimulate cross-border investments
A new tax treaty between Belgium and Japan was signed on 12 October 2016. This treaty, once it becomes applicable, will significantly increase cross-border business opportunities for individuals and corporations investing in Japan and Belgium. The most important new features are highlighted below.
Significant decrease in withholding tax rates…