Germany: New Income Tax Treaty between Japan and Germany

New Income Tax Treaty between Japan and  Germany 

On 28 September 2016 the mutual notifications neces sary for the entry into force of the amended Japan Germany Tax Treaty signed on 17 December 2015 were completed. The new Tax Treaty is applicable since  January 2017 and replaces the previous Tax Treaty from 1966. The structure follows generally the OECD  Model Tax Convention. 

What is new? 

o Residency of an individual in one of the  Contracting States entails the legitimacy of the  Tax Treaty 

If a person is tax resident in Japan and in Germany,  in the previous DTA the authorities had to come to a mutual agreement. The new DTA follows the  OECD Model tax Convention in this point, too. Therefore the residence article provides ‘tie breaker’ rules for determining in which of the two  states an individual who is dual-resident under  the respective domestic laws should be treated  as resident for the purposes of the agreement. The rules comprise the following series of tests to be applied successively until residence for the purposes of the agreement is allocated to Japan or Germany: 

•  permanent home 

•  centre of vital interests 

•  habitual abode 

•  nationality 

o Dividend payment: Reduction of the  withholding tax rates 

The withholding taxes on dividend payment  were partly lowered. Instead of 15% withholding  tax on basis of the past DTA, the withholding tax is reduced to 0% for a minimum shareholding amount of 25%, if the holding time is minimum 18 months. If the minimum shareholding amount  is less than 25% but at least 10% and the holding time of the shares is at least six months, the  withholding tax is reduced to 5%. In all other cases, the withholding tax is still 15%. 

o Interest and royalties 

Interest and royalties can only be taxed in the  country, where the beneficial owner is resident. A  withholding tax is no longer provided. 

But there is an exemption, if the interest is based  

on profit (profit participation). In this case, the source country can tax the interest payment, too. If Germany is the source country an additional prerequisite is that the interest payment is tax  deductible for the payer. 

As in other DTAs, that are based on the OECD Model Tax Convention, the interest and royalty article is only applicable for the payments that are in accordance with the arm´s length principle. 

o Capital gains 

Until the new DTA is was possible to have Real  Estate in a corporation and to sell the shares of this  Real Estate Corporation and the taxation right of the country where the real estate is situated was totally restricted. With the new DTA, the country, where the real estate is situated can tax the capital  gain of the sale of the shares, if the total assets of the corporation are more than 50%. 

o Prevention of double taxation 

If Japan is the residence state, double taxation is prevented by using the tax credit method. 

If Germany is the residence state, the exemption method is applicable in most cases. 

Totally new is a switch-over-clause. This means Germany switches from the exemption to the tax  credit method, in case Japan subsumes the type of income into another DTA article than Germany or if Japan could tax the income on basis of the DTA but  effectively does not tax this income. 

o Exchange of information 

The new DTA will lead to an expansion of the information exchange. 

Conclusion 

As the economic links between Japan and Germany  are tight, the new DTA should be a good basis to  avoid double taxation scenarios. This might lead to an increase of mutual investments.

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