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New Zealand Japan tax treaty - updated double tax agreement

On 10 December 2012 an updated double tax agreement ("Tax Treaty") between New Zealand and Japan was signed by Japan’s Parliamentary Senior Vice Minister of Foreign Affairs, Kazuya Shimba, and the New Zealand Ambassador to Japan, Mark Sinclair. This agreement marks a renewed commitment to the trading relationships between both countries and seeks to improve the flow of trade and cross-border business between New Zealand and Japan. It also marks the 60th anniversary of formal diplomatic relationships between our two countries.

The existing Tax Treaty between New Zealand and Japan (1963) is New Zealand's oldest, and is outdated in terms of the new wave of modern Tax Treaties that New Zealand has been re-negotiating for 3 years. This new Treaty contains many terms in common with this more modern model, and introduces considerable new international tax relief that does not currently exist.

Some key features under this new Tax Treaty that may be of particular interest to your business with operations in Japan, or in New Zealand (for Japanese outbound companies) are:

  • Withholding tax on interest outflows limited to 10%, and in cases of financial institution lenders, reduced to 0% (previously no Treaty limitation on domestic taxation of 15%).
  • Withholding tax on outflows of royalties limited to 5% (previously no Treaty limitation on domestic taxation of 15%).
  • Withholding tax on dividend outflows remains limited to 15%, but under new provisions it will in many cases be possible to have this reduced to 0% (if certain criteria are met).
  • Under what constitutes a "permanent establishment", greater clarity is provided to when activities undertaken within New Zealand by a resident of Japan (or Japan, for a New Zealand resident) will amount to a business that is subject to local taxation, or exemption.
  • There are a range of other new Tax Treaty clauses that will need to be examined closely to determine the how your tax status and may be affected, or how your existing activities will be impacted, some of which may be more beneficial, and others that may introduce restrictions to accessing tax relief.

The 0% dividend tax criteria referred to above appears to be the most favourable relief provided yet under New Zealand's newly re-negotiated Treaties. For example, and by comparison, under the Australian Treaty, 80% corporate ownership for a 12 month period is required to gain 0% tax limitation, where as this Japan Treaty only requires 10% ownership (for 6 months) to benefit from the 0% tax limitation.

This may bring about positive implications to your business, with potentially significant tax savings, greater ease, and lower cost of investment in each country.

As there are various NZ and Japanese legal and diplomatic requirements before the new DTA will come into force, it is likely that the DTA will only come into force from 2014, or potentially later.

We will continue to keep you up to date with the most recent changes in the regulatory and business environment.

If you have any queries please your usual EY advisor or:

Brad Wheeler
Japanese Business Services Leader NZ
Phone : +64 9 300 8165
brad.wheeler@nz.ey.com  

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