On October 28, 2016, the new tax agreement between Japan and
Germany ("Agreement between Japan and the Federal Republic of
Germany for the Elimination of Double Taxation with Respect to
Taxes on Income and to Certain Other Taxes, and the Prevention of
Tax Evasion and Avoidance"; hereinafter referred to as the
"New Agreement") came into force following the completion
of all necessary procedures. The New Agreement applies to taxes for
any taxable year beginning on or after January 1, 2017 (in the case
of taxes levied on the basis of a taxable year) and to taxes levied
on or after the same date (in the case of taxes not levied on the
basis of a taxable year).
New Provision Regarding Taxation of Business
Profits. With respect to the taxation of business profits
attributable to a permanent establishment ("PE") such as
a branch of a foreign corporation, under the New Agreement, the
"arm's-length principle" must be applied in a
stricter manner for the calculation of profits attributable to the
PE. Among other areas, internal dealings between the head office
and its branch should be recognized in calculating attributable
profits in principle (Article 7).
Expansion of the Exemptions from and Mitigation of
Source-Country Taxation. The New Agreement expands the
exemptions from and mitigation of source-country taxation on
investment income (i.e., dividends, interest and royalties).
Specifically, (i) as for dividends, while under the Former
Agreement the applicable tax rate in a source-country was 10
percent of the gross amount of dividends payable between certain
affiliates and 15 percent for other dividends, the New Agreement
relaxes source-country taxation rules to allow for three scenarios:
either (a) the dividends are tax exempt if the beneficial owner of
the dividends directly owns 25 percent or more of the voting shares
of the paying company for at least 18 months, (b) the applicable
tax rate is 5 percent of the gross amount of the dividends if the
beneficial owner of the dividends owns 10 percent or more of the
voting shares of the paying company for at least six months, or (c)
the applicable tax rate is 15 percent in all other cases (Article
In addition, (ii) as for interest and royalties, while both of
them were generally subject to a tax of 10 percent in a source
country under the Former Agreement, the New Agreement makes both
payments tax exempt (Articles 11 and 12).
It should be noted that the benefits set forth in (i) and (ii)
above are subject to satisfaction of the requirements under the
limitation on benefits clause as described below and the completion
of certain procedures as provided in Article 27.
Introduction of the Limitation on Benefits
Clause. A resident of a contracting state is entitled to a
benefit under the New Agreement only if such resident is considered
a "qualified person" or otherwise objectively satisfies
alternative requirements. Notwithstanding the above, a benefit
under the New Agreement will be denied if it is reasonably
concluded that, with regard to all relevant facts and
circumstances, obtaining the benefit was one of the principal
purposes of the relevant transaction (Article 21).
* * *
As seen above, the New Agreement substantially changes the
existing tax treatment under the Former Agreement and thus is
worthy of attention when Japanese companies with a parent,
subsidiary, or branch in Germany, or those companies having a
counterparty in Germany, carry out transactions going forward.
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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On January 24, 2017, the Central Board for Direct Taxes issued a circular enumerating the Guidelines for Determining the Place of Effective Management (hereinafter referred to as "POEM Guidelines") of a company.
The proposed law further provides that such adjustment amount, if not repatriated into India within the prescribed period, the same shall entail a notional interest which would also be subject of tax.
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