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