Tax treaties

Main points

  • Tax treaties will modify the scope of exposure to Japanese taxes for a foreign company
  • Many tax exemptions may apply to a foreign company
  • In order to benefit from tax exemptions, the company has to notify the relevant Japanese tax office

Most of the European Union member states have signed a bilateral tax convention with Japan in order to avoid double taxation,  to prevent tax evasion and tax avoidance and to promote investment and economic exchanges.

Source: Ministry of Finance, Japan’s Tax Convention Network, 2014

Generally speaking, international tax agreements include the following definitions and rules, without being exhaustive:

  • Definition of a resident, the non-discrimination rule, the source of income rule

  • Definition of a permanent establishment (PE), taxation of business income, income from international transportation
  • Definition and taxation rule for dividend, interest, royalty, real estate income and capital gain
  • Definition of independent professional income, employment income and tax-exemption on short stay for professors, students, government officers and diplomats
  • Mutual consultation by competent tax authorities, smooth exchange of information

Source: PKF, Doing Business in Japan

  

A tax treaty can substantially modify a company’s exposure to Japanese taxation. Many criteria can be changed by a tax treaty, especially in case of qualification of a permanent establishment. For an European SME wishing to do business in Japan, it is therefore important to verify the content of the treaty.

If there is no tax treaty between the SME member state and Japan, the Japanese tax law will enter into in force and all the situations defined of an agent PE will create a taxable presence in Japan.

 

The following European Union member states have concluded bilateral treaty on tax with Japan  (As on April 1st, 2014):

  • Austria
  • Belgium
  • Bulgaria
  • Czech Republic
  • Denmark
  • Finland
  • France
  • Germany
  • Hungary
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Spain
  • Sweden
  • UK

The following EU-member states have not concluded any tax treaty with Japan so far:

  • Croatia
  • Cyprus
  • Estonia
  • Greece
  • Latvia
  • Lithuania
  • Malta
  • Slovenia 

The companies having their head offices in one of member states without tax treaties will be fully exposed to the Japanese taxation system regarding permanent establishment definitions.

The table below shows the exposure to Japanese taxes for each member state according to each bilateral treaty. If the agent is treated as a PE, it means that the company is taxable in Japan.

Tax treaties may also organise many exemptions for foreign companies operating in Japan. It is important to check possible tax reliefs when doing business in Japan at the tax offices or with a tax accountant. In order to receive tax relief measures, it is required to submit notification concerning the tax treaties to the relevant tax office.

 

Modifications made by tax treaties to the “permanent establishment” definition

Country

Bilateral tax treaty (date, article)

Contract concluding
agent  (i.e. authorised representative)

Order-fulfilling agent

(i.e. storage and delivery)

Order-securing agent

Building site or construction or installation project

Austria

Yes (1963, 4)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Belgium

Yes (1968, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Bulgaria

Yes (1993, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 6 months

Croatia

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Cyprus

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Czech

Republic

Yes (1978, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Denmark

Yes (1968, 5)

Treated as PE

Treated as PE

Not taxable

Treated as PE
over 12 months

Estonia

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Finland

Yes (1972, 5)

Treated as PE

Not taxable in

Not taxable

Treated as PE
over 12 months

France

Yes (1995, 5)

Treated as PE

Not taxable in

Not taxable

Treated as PE
over 12 months

Germany

Yes (1966, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Greece

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Hungary

Yes (1980, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Ireland

Yes (1974, 6)

Treated as PE

Treated as PE

Not taxable

Treated as PE
over 12 months

Italy

Yes (1969, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Latvia

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Lithuania

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Luxembourg

Yes (1992, 5)

Treated as PE

Not taxable

Not taxable

TTreated as PE
over 12 months

Malta

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Netherlands

Yes (2010, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Poland

Yes (1980, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Portugal

Yes (2011, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Romania

Yes (1976, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Slovakia

Yes (1978, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Slovenia

No

Treated as PE

Treated as PE

Treated as PE

Treated as PE
over 12 months

Spain

Yes (1974, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

Sweden

Yes (1983, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

UK

Yes (2006, 5)

Treated as PE

Not taxable

Not taxable

Treated as PE
over 12 months

 

 

Below is a list of links to the original texts of the tax treaties that EU member states have concluded with Japan.

Country

Austria

Belgium

Bulgaria

Czech Republic

Denmark

Finland

France

Germany

Hungary

Ireland

Italy

Luxembourg

Netherlands

Poland

Portugal

Romania

Slovakia

Spain

Sweden

United Kingdom