Historically, the Netherlands and Japan are important trading partners. On August 25, 2010, a new tax treaty between the Netherlands and Japan was signed. Once in force, this treaty will replace the current tax treaty between these two countries.
The new treaty provides for — among other things — a further reduction or exemption of the withholding taxes on dividends, interests and royalties. The new tax treaty will be of great importance due to significant inbound and outbound investments to and from Japan through Dutch companies. This new treaty will further strengthen the economic relationship between the Netherlands and Japan.
The new treaty needs to be ratified by both countries. It will apply on or after January 1 in the calendar year following that in which the treaty is effectively ratified.
The main changes of the new tax treaty can be summarized as follows:
The most important change is the introduction of a full dividend withholding tax exemption (in the current tax treaty the rate is (at least) five percent) if the beneficial owner of the dividends is a resident of the other Contracting State and is either:
- a company that has owned, directly or indirectly, shares representing at least 50 percent of the voting power of the distributing company for the period of six months ending on the date on which entitlement to the dividends is determined; or
- a pension fund, provided that such dividends are not derived from the carrying on of a business, directly or indirectly, by such pension fund.
The maximum dividend withholding tax rate under the new treaty is reduced to five percent if the beneficial owner of the dividends is a company that directly or indirectly holds at least 10 percent of the voting power of the distributing company for a period of six months ending on the date on which entitlement to the dividends is determined.
The maximum dividend withholding tax rate is reduced to 10 percent in all other situations.
In addition, article 22 (“Elimination of double taxation”) now explicitly states that dividends distributed by a Dutch resident entity to its Japanese resident corporate shareholder, are excluded from the basis upon which the Japanese tax is imposed, provided this Japanese shareholder holds at least 10 percent of either the voting power or shares of the distributing Dutch company during the period of six months immediately before the day the obligation to pay the dividends is confirmed (Japanese participation exemption).
The maximum interest withholding tax rates will be:
- zero percent if the interest is paid to:
- the government (or certain governmental institutions) of the other Contracting State
- a bank;
- an insurance company;
- a securities company; or;
- any other company that in the three preceding years derived more than 50 percent of its liabilities from the issuance of bonds in financial markets or from taking deposits at interest, and more than 50 percent of the assets of the enterprises consist of debt-claims against persons which are not a related company and pension funds; and
- 10 percent in all other situations.
Note that the Netherlands does not levy a withholding tax on outgoing interest payments.
The withholding tax on royalties is reduced to zero percent (from 10 percent). Note that the Netherlands does not levy a withholding tax on outgoing royalty payments.
Limitation on Benefits
The above mentioned zero percent withholding tax rates will only apply if the so-called “limitation on benefits” requirements are met (article 21 of the Japanese/Netherlands tax treaty). Based on these requirements, a taxpayer can only benefit from the reduced treaty rates if such taxpayer qualifies under one of the limitation on benefits tests (e.g., the stock-exchange test, the headquarter test or the equivalent beneficiary test). Although many existing Japanese/Netherlands investment structures may still meet the limitation on benefits test, these structures should be reviewed.
Tokumei Kumiai Investments
Many multinationals have structured their inbound Japanese investments through a Japanese silent partnership (a so-called Tokumei Kumiai, or TK) with a Dutch silent partner, because under the current tax treaty a TK can distribute its profits free of Japanese corporate income tax or withholding tax.
Based on article 9 of the Protocol to the new tax treaty, Japan may tax the income and capital gains from silent partners in a TK. This may effectively result in a 20 percent Japanese withholding tax on distributions by a TK to its Dutch resident silent partner.
Transfer Pricing Adjustments
Under article 9, paragraph 2 and 3 of the new treaty, a transfer pricing adjustment made by one country will be followed by a corresponding adjustment of the other country, provided the competent authorities of both countries agree that part of the profits of a company that are charged to tax in one country would have been accrued to a company of the other country if the conditions between these two companies would have been those which would have been made between independent companies.
Mutual Agreement Procedure
The mutual agreement procedure (MAP) to avoid double taxation is now included in the new treaty in more detail (article 24). In addition, the MAP introduces an independent arbitration committee in case of a dispute concerning double taxation that has not been solved by the authorities of both countries within two years of the presentation of the dispute to the authorities. This is the first treaty that Japan closes in which this procedure is arranged.
Based on article 13 of the new treaty (capital gains), gains derived by a resident of a Contracting State from the alienation of shares in a company or of interests in a partnership or trust may in principle be taxed in the other Contracting State to the extent the shares or the interests derive at least 50 percent of their value directly or indirectly from immovable property situated in that other Contracting State.