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Iceland-Japan

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Tax Treaty between Iceland and Japan has Entered into Force

The income tax treaty between Iceland and Japan entered into force on 31 October 2018. The treaty, signed 15 January 2018, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Icelandic income taxes to the state, income tax to the municipalities, and the special hydrocarbon tax. It covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant taxes.

Residence

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, having regard to 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.

Withholding Tax Rates

  • Dividends -  
    • 0% if the beneficial owner is a company that has directly or indirectly owned at least 25% of the paying company's capital (in case of Iceland payer) or voting power (in case of Japan payer) for a period of at least 6 months ending on the date on which entitlement to the dividends is determined, or the beneficial owner is a pension fund, provided that the dividends are derived from specified activities;
    • 5% if the beneficial owner is a company that has directly or indirectly owned at least 10% of the paying company's capital (in case of Iceland payer) or voting power (in case of Japan payer) for a period of at least 6 months ending on the date on which entitlement to the dividends is determined;
    • Otherwise 15%
  • Interest - 0%, although a rate up to 10% may apply on interest that is determined by reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person, or any other interest similar to such interest
  • Royalties - 0%

Note - Article 10 (Dividends) specifically provides that the reduced rates on dividends (0%/5%) do not apply in the case of dividends that are deductible in computing the taxable income of the company paying the dividends in the Contracting State of which that company is a resident.

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other State (exemption if the shares or comparable interests are traded on a recognized stock exchange and the alienator together with related parties own in the aggregate 5% or less of the shares or comparable interests).

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Silent Partnership

Article 20 (Silent Partnership) provides that any income and gains derived by a silent partner in respect of a silent partnership (Tokumei Kumiai) contract or another similar contract may be taxed in the Contracting State in which such income and gains arise and according to the laws of that Contracting State.

Entitlement to Benefits

Article 22 (Entitlement to Benefits) includes a number of 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.

Article 22 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.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Arbitration

Article 25 (Mutual Agreement Procedure) includes the provision that where taxation disputes have not been resolved through consultation between the competent authorities of the Contracting States within two years, the unresolved issue will be submitted to arbitration if requested. Unresolved issues may not, however, be submitted to arbitration if a decision on the issues has already been rendered by a court or administrative tribunal of either Contracting State.

Effective Date

The treaty generally applies from 1 January 2019, although Article 26 (Exchange of Information and 27 (Assistance in the Collection of Taxes) applies from the date of the treaty's entry into force without regard to the date on which the taxes are levied or the taxable year to which the taxes relate.

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