The new income tax treaty between Japan and Denmark will enter into force on 27 December 2018. The treaty, signed 11 October 2017, replaces the 1968 tax treaty between the two countries.
The treaty covers Danish corporation income tax, individual income tax, individual municipal income tax, taxes imposed under the Hydrocarbon Tax Act, taxes imposed under the Pension Investment Return Tax Act, church tax, tax on dividends, and tax on royalties. It covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant taxes.
If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.
The PE article includes anti-PE avoidance measures as per BEPS Action 7.
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Article 21 (Entitlement to Benefits) includes substantial provisions regarding a resident's entitlement to benefits under the treaty. This includes that a resident of a Contracting State will only be entitled to the withholding tax exemptions provided under Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) if the resident is a qualified person (as defined in the treaty) or meets certain other conditions. There are also provisions to limit benefits where income is attributed to a permanent establishment in a third state and where a resident of a Contracting State is only subject to tax in that State on income remitted to or received in that State.
Article 21 also includes a general anti-abuse provision, which provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.
Both countries generally apply the credit method for the elimination of double taxation.
Article 24 (Mutual Agreement Procedure) includes the provision that where taxation disputes have not been resolved through consultation between the tax authorities of the Contracting States within two years, the unresolved issue will be submitted to arbitration if requested.
The final protocol to the treaty provides that any income and gains derived by a silent partner who is resident in Demark in respect of a silent partnership (Tokumei Kumiai) contract or another similar contract may be taxed in Japan according to its laws if such income and gains arise in Japan.
The new treaty applies from 1 January 2019. The 1968 tax treaty between the two countries ceases to apply and terminates on that date.
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