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UK Ratifies Protocol to the Tax Treaty with Japan

On 16 July 2014, the U.K. ratified the pending protocol to the 2006 income and capital tax treaty with Japan. Key changes are summarized as follows

Business Profits

The article on business profits is amended to include the provision that business income attributable to a PE will be calculated based on the arm’s length principle as if the PE were a separate and independent enterprise from its head office. This is in line with the OECD model.


The article on dividends is changed to provide withholding tax exemption if the beneficial owner holds at least 10% of the paying company's for a period of at least 6 months. Under the current treaty exemption is limited to 50% holdings, and 10% holdings are provided a reduced withholding rate of 5%. In other cases the withholding rate remains the same, at 10%.

Taxation of Share Transfers

The protocol repeals the provisions that when a resident of a Contracting State derives gains from the alienation of shares in a company resident in the other State, and those gains are not subject to tax in the first mentioned Contracting State, they  may be taxed in that other State, if:

  • The alienator owns at least 25% of the total issued shares at any time during the taxable year or chargeable period in which the alienation takes place, taking into account those owned by any related or connected person; and
  • The total of the shares alienated amounts to at least 5% of the total issued shares of such company

Arbitration Procedures

The protocol introduces mandatory binding arbitration procedures.

Assistance in Collecting Taxes

The protocol expands the provisions regarding assistance in the collection of taxes.

Entry into Force and Effect

The protocol will enter into force 30 days after the ratification instruments are exchanged. For withholding taxes, it will apply from 1 January of the year following its entry into force for both countries.

For other taxes, the treaty will apply for Japan from 1 January of the year following its entry into force, and for the U.K. it will apply for corporation tax from 1 April of the year following its entry into force, and for income tax and capital gains tax from 6 April of the year following its entry into force.

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