Global Tax Alert | 20 December 2013
Japan and UK sign protocol amending the tax treaty
On 17 December 2013, Japan and the United Kingdom (UK) signed a protocol (the Protocol) amending the existing tax treaty between the two countries, signed and enacted in 2006. This is a second protocol and provides further reductions to withholding taxes for dividend and interest. In addition, the Protocol repeals the potential for taxation to apply in the country of residence of the subsidiary (i.e., Japan) on capital gains arising on a transfer of shares in the subsidiary and introduces a new provision on the taxation of business income attributable to a permanent establishment (PE). The aim of the Protocol is to stimulate economic activities between the two countries by allowing more tax efficient investment opportunities. This Alert highlights the key points of the Protocol.
Reduction in withholding taxes on dividends and interest
Withholding tax on dividends and interest will be reduced as follows:
at least 50% for 6 months
at least 10% for 6 months
less than 10%
* Certain types of interest calculated based on debtor's revenue, income, movement of value of assets, etc. will still be subject to 10% withholding tax.
Introduction of a new provision for business income
The Protocol introduces a new provision for taxation on business income attributable to a PE, which is in line with the new Article 7 of the OECD Model Treaty. Under the new provision, business income attributable to the PE will be calculated based on the arm's length principle as if the PE were a separate and independent enterprise from its head office.
Repeal of taxation in the country of residence of the subsidiary on capital gains arising on the transfer of shares in the subsidiary
The Protocol repeals the current provision that imposes taxation, in the country of residence of the subsidiary (i.e., Japan), on gains derived from a transfer of shares in the subsidiary, if the seller owns at least 25% of total issued shares and sells at least 5% of total issued shares in a particular year, when such gain is exempt from tax in the country of residence of the parent (i.e., UK). Accordingly, taxation rights will become exclusively with the country of residence of the parent which is disposing of the shares.
The Protocol also includes the following provisions:
- • Introduction of mandatory binding arbitration procedures
- • Expansion of provisions regarding assistance in the collection of taxes
Each country must ratify the Protocol and notify to the other country completion of the ratification before the Protocol enters into force. The Protocol will enter into force on the thirtieth day after the date of exchange of diplomatic notes indicating such ratification.
The Protocol will have effect in Japan for withholding taxes for amounts taxable on or after the first day of January following the date on which it enters into force. With respect to other income taxes, the Protocol will apply to taxable years beginning on or after the first day of January following the date on which it enters into force.
In the United Kingdom, the Protocol will be applicable in relation to withholding taxes on income derived on or after the first day of January following the date on which the Protocol enters into force. With respect to other income taxes and capital gains tax, the Protocol will apply for any year of assessment beginning on or after 6 April in the year next following that in which the Protocol enters into force. For corporation tax, the Protocol will have effect for financial years beginning on or after 1 April in the calendar year next following the date on which the Protocol enters into force.
Some specific provisions in the Protocol will apply from the date that the Protocol enters into force.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Shinnihon Tax, Tokyo
- • Emi Kono
+81 3 3506 2182
- • Hiroyuki Nishida
+81 3 3506 2026
Ernst & Young LLP, London
- • Kingsley Kemish
+44 20 7951 4797
Ernst & Young LLP, Japanese Tax Desk, New York
- • Kojiro Oka
+1 212 773 0228
Ernst & Young LLP, UK Tax Desk, New York
- • Matthew Newnes
+1 212 773 5185
Ernst & Young LLP, Asia Pacific Business Group, New York
- • Chris Finnerty
+1 212 773 7479
- • Jeff Hongo
+1 212 773 6143
- • Kaz Parsch
+1 212 773 7201
- • Bee-Khun Yap
+1 212 773 1816
EYG no. CM4054