13-01-2010
New beneficial tax treaty Japan-Netherlands

On the 18th of December, the Netherlands and Japan have agreed on a new tax treaty. The main benefits of the new treaty are reduced withholding tax rates. The dividend withholding tax rate will for example be 0% for qualifying shareholdings. The official signing of the new tax treaty is expected by early summer of 2010; by which time the official text will be made publicly available. It is expected that the new Convention becomes effective as of January 1st, 2011.

The full text of the new treaty is not yet available but based on our sources the most important changes are as follows (subject to amendments until official signing):

• A new tie-breaker rule, by means of a mutual agreement procedure, will be introduced for determining the residency of dual-resident entities, all relevant circumstances will be taken into consideration to determine the residency;
• A transfer pricing adjustment imposed by one State will in principle result in a corresponding adjustment in the other State.
• The article concerning capital gains will contain rights for the source State to levy tax, in particular to immovable property;
• The new treaty contains further reductions or exemptions of withholding tax. The most important reduction considers a full dividend withholding tax exemption for beneficial owners of shareholdings representing at least 50% of the voting rights in a subsidiary (and subject to other specific requirements). Other reductions are:

• In the new treaty Japan explicitly has the right to tax income and gains from sleeping partners in a “Tokumei Kumiai” or similar contract.
• Strict “limitation of benefits” rules will be introduced which are based on the treaty between the US and the Netherlands. Further details are available upon request.

Taxand’s Take
The current Dutch – Japanese tax treaty stems from 1970. Given the many Japanese investments in the Netherlands, there is a clear need to update the treaty. In recent history, there have been some political discussions when the Netherlands proposed to decrease its corporate income rate to 25% or less, as this would have created Japanese CFC issues for investments held in or through the Netherlands. This may be one of the reasons that the Netherlands now has a 25.5% corporate income tax rate.

The new treaty and especially the proposed new withholding tax rates (under circumstances even an exemption) will further strengthen the position of the Netherlands as one of the most important countries for Japanese companies to invest in.

Your Taxand contact for further queries is:

Marc Sanders
T. +31 20 757 09 05
E. marc.sanders@vmwtaxand.nl