Russian Federation: Draft Of New Russia-Japan Tax Treaty Published

Last Updated: 6 November 2017
Article by Victor Kalgin, Yuko Fite and Dmitry Nikolaev

The draft of a new double tax treaty between Russia and Japan1 has been published on the Russian Government's official website.2

The new treaty will replace the current treaty which was signed in 1986.3 It is possible that the document will be signed during the Eastern Economic Forum due to take place on 6-7 September in Vladivostok.

Below we consider the key points of the new tax treaty.

Scope of Application

Like the current treaty, the new treaty applies to residents of one or both states. It also defines and lays down special taxation rules for structures "which are considered wholly or partially tax transparent".

The treaty applies to taxes on income. In Russia this means profits tax and personal income tax, while in Japan it means income tax, corporation tax, the special income tax for reconstruction and local corporation and inhabitant taxes.

Definition of Residence

The new treaty adopts the traditional definition of tax residence whereby a person is taxed on the basis of the domestic laws of a respective state. Notably, dual residence situations are to be resolved through mutual agreement procedures and the treaty will not apply unless the competent authorities of Russia and Japan reach agreement on the matter.

Permanent Establishment

As in the current treaty, the new document defines a permanent establishment as a "fixed place of business through which the business of an enterprise is wholly or partly carried on". A permanent establishment is not created by activity of a preparatory or auxiliary nature or by a building site which exists for less than 12 months.

The new treaty, like the current one, provides that a permanent establishment may be created by a "dependent agent" who acts on a company's behalf and concludes contracts or plays the principal role leading to the conclusion of contracts.

The new treaty contains a number of exclusions relating to preparatory and auxiliary activities and the definition of an independent agent, which are intended to limit abuse of those rules. For example, activity will not be considered preparatory and/or auxiliary if the combination of that activity and other activity carried on by the same or a "closely related" enterprise gives rise to a permanent establishment. Also, an agent will not be regarded as independent if it acts exclusively or almost exclusively on behalf of an enterprise to which it is closely related.

Taxation of Immovable Property

As with the current treaty, the new treaty allows immovable property to be taxed in the country where it is situated. Ships and aircraft are not classed as immovable property.

Withholding Tax

One of the most significant changes is the substantial reduction of withholding tax rates for dividends, interest and royalties.

In particular, dividends may be taxed at the rate of 5% (compared with 15% at present) provided that 15% of voting shares have been owned for a period of 365 days. If these conditions are not met, the rate increases to 10%. However, dividends from a company (or a partnership, trust, foundation, etc.) will be taxable at 15% if immovable property comprised 50% or more of the company's assets at any time during the 365 days preceding the payment of the dividends.

Under the new treaty, interest is exempt from withholding tax (the rate under the current treaty is 10%). However, interest that is determined by reference to profits, income, changes in the value of property, dividends, etc., is taxable at 10%.

Royalties are similarly exempt from withholding tax (compared with the 10% rate applicable to most kinds of royalties under the current treaty).

Income from the Alienation of Property

Income from the alienation of property is to be taxed only in the state of which the person receiving the income is a resident, with the exception of:

  • Immovable property
  • Property attributable to a permanent establishment
  • Shares and interests in companies (and trusts, foundations, etc.) which derived at least 50% of their value directly or indirectly from immovable property at any time during the 365 days preceding the alienation

With regard to shares in companies with immovable property, the new treaty makes an exception for cases where shares are traded on a recognised exchange and the seller and related persons own an aggregate interest of no more than 5%.

Right to Benefits

The new treaty contains a detailed definition of the concept of a "qualified person" and provides that only such persons have the right to reduced rates of withholding tax on dividends, interest and royalties. Qualified persons include:

  • Individuals
  • Government bodies and state institutions
  • Companies and other entities whose shares are regularly traded on one or more recognised stock exchanges4
  • Pension funds where at least 50% of their beneficiaries are individuals who are residents of Russia or Japan
  • Entities in which at least 50% of shares are held by the above-mentioned persons for at least one half of the days in any twelve-month period, including the time during which the relief is granted

In addition, benefits are granted to pension funds and other entities in which "equivalent beneficiaries" own at least 75% of shares (are beneficiaries, members, participants, etc., owning at least 75% of the interests). Any persons who could be entitled to benefits under domestic laws, the new treaty or any other international document are considered to be equivalent beneficiaries.

Finally, withholding tax relief for dividends, interests and royalties is granted to persons involved in business activity in their country of residence where income received in the second state (i.e. dividends, interest and royalties) arises from or in connection with that business activity. It is stated that business activity does not include:

  • Holding activities
  • Supervision and management of a group of companies
  • Group financing
  • Investment or investment management (excluding banks, insurance companies and securities dealers)

Where income is received from related persons, the above-mentioned conditions for the application of relief are met if the business activity is substantial in relation to income received, as must be determined on the basis of all the facts and circumstances.

It is noteworthy that business activity conducted by related parties of a resident is considered to be conducted by that resident.

The new treaty provides that persons who are not formally entitled to benefits may nevertheless be granted such benefits by decision of the competent authority of the state in which tax is withheld at source.

Finally, it is provided that tax benefits will not be granted if a transaction or structure has the receipt of such benefits as one of its principal purposes.

Other Provisions

The new treaty contains provisions concerning non-discrimination, mutual agreement procedures, the exchange of information and assistance in the collection of taxes, which is in keeping with recent practice in the conclusion of tax treaties by Russia.

It is stated in the Protocol to the treaty that residence certificates issued by the competent authorities of Russia and Japan do not require legalization or an apostille.

Entry into Force

Once the new treaty has been signed it has to be approved in accordance with the legal procedures of both countries, and the countries will notify each other that this has been done. It will enter into force on the thirtieth day after the exchange of notifications. The treaty will apply from the year following the year in which it enters into force. In view of the length of the procedures involved, it is not clear how feasible it is for the new treaty to take effect in 2018. It might not be until 2019 that it actually begins to be applied.


In view of the changes contained in the new treaty, it may be useful to analyse:

  • The scope for applying reduced rates in relation to dividends distributed from Russia to Japan and the need to provide evidence of "qualified person" status and beneficial ownership
  • The need to change existing operating structures in order to reduce tax risks, such as permanent establishment risk or disallowance of reduced withholding tax rates

Opportunities for reducing the tax burden and increasing the tax efficiency of existing and planned operations and structures


1. Convention between the Government of the Russian Federation and the Government of Japan for the Avoidance of Double Taxation with Respect to Taxes on Income and the Prevention of Tax Avoidance and Evasion.

2. Regulation No. 1815-r of the Russian Government of 24 August 2017 (

3. Convention of 18 January 1986 between the Government of the Union of Soviet Socialist Republics and the Government of Japan for the Avoidance of Double Taxation with Respect to Taxes on Income.

4. Recognised stock exchanges are those established under and regulated by the laws of Russia or Japan and any other exchanges agreed upon by the competent authorities of the two countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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