Global Tax Alert | 2 July 2013

New Japan-Portugal tax treaty enters into force

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Executive summary

In December 2011, the governments of Japan and the Portuguese Republic signed a new income tax treaty (treaty), which is the first treaty concluded between the two countries. On 28 June 2013, the mutual notifications of the completion of the necessary domestic procedures were completed. In accordance with Article 28 of the treaty, the new treaty will enter into force on 28 July 2013, and will apply to the following taxes in Japan:

  • with respect to taxes withheld at source, for amounts taxable on or after
    1 January 2014;
  • with respect to taxes on income which are not withheld at source, as regards income for any taxable year beginning on or after 1 January 2014; and
  • with respect to other taxes, as regards taxes for any taxable year beginning on or after 1 January 2014.

This new treaty is expected to stimulate the economic activities between the two countries by bringing reduced withholding tax on investment income and more clarity on how the activities are taxed in each country. This Alert highlights the key treaty provisions.

Taxes covered

Article 2 covers income tax, corporation tax, special income tax for reconstruction, special corporation tax for reconstruction and local inhabitant taxes for Japan and personal income tax, corporate income tax and the surtaxes on corporate income tax for Portugal.

Withholding taxes


If a shareholder directly owns at least 10% of the voting shares of a Japanese company or 10% of the capital of a Portuguese company for more than 12 months, a 5% the withholding tax rate applies. In all other cases, a 10% rate will be assessed.


A zero rate is provided for interest received by Governments, the Central Bank and similar governmental units; a 5% rate in cases where the interest is beneficially owned by a bank which is a resident of the source country and is established and regulated under the laws of the source country; and 10% in all other cases.


A 5% withholding tax rate is applicable to royalty payments.

Capital gains

Capital gains derived from assets other than those from disposition of the following assets are taxable only in the resident country.

Capital gains taxable in the source country:

  • Immovable property located in the source country.
  • Shares/interests in a company/partnership/trust at least 50% of whose value consists directly or indirectly of immovable property located in the source country.
  • Property forming part of the business property of a permanent establishment which the seller has in the source country.
  • Shares in a certain bankrupt financial institution to which substantial financial assistance is provided by the source country.

Measures to prevent treaty abuse

Article 21 of the treaty includes a limitation of relief provision that limits the availability of treaty benefits if the main purpose of creation or assignment of any right or property which generates income is to take advantage of the treaty benefits.

Other provisions

The treaty and its Protocol also include the following provisions:

  • full taxing right granted to the source country on income derived from Tokumei Kumiai, silent partnership or similar arrangement;
  • application of the treaty for income received through a pass-through entity; and
  • inclusion of an arbitration provision in the mutual agreement procedure.

In light of the reduced withholding tax rates on investment income (i.e., dividends, interest and royalties) and the capital gains tax exemption derived from disposition of shares in a subsidiary, as well as a less restrictive anti-abuse treaty provision, Portugal may be considered as an alternative holding company jurisdiction for foreign companies investing into Japan.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Shinnihon Tax, Tokyo
  • Emi Kono
    +81 3 3506 2447
  • Hideyuki Ebihara
    +81 3 3506 2770
Ernst & Young LLP, Japanese Desk, New York
  • Kojiro Oka
    +1 212 773 0228
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris J. 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. CM3591