- Expansion of the Exemptions from and Mitigation of Source-Country Taxation
- November 2, 2016 | Authors: Harukuni Ito; Kyosuke Katahira; Yuichiro Mori; John C. Roebuck; Takako Yako
- Law Firm: Jones Day - Tokyo Office
- The New Agreement expands the exemptions from and mitigation of source-country taxation on investment income (i.e., dividends, interest and royalties).
Specifically, (i) as for dividends, while under the Former Agreement the applicable tax rate in a source-country was 10 percent of the gross amount of dividends payable between certain affiliates and 15 percent for other dividends, the New Agreement relaxes source-country taxation rules to allow for three scenarios: either (a) the dividends are tax exempt if the beneficial owner of the dividends directly owns 25 percent or more of the voting shares of the paying company for at least 18 months, (b) the applicable tax rate is 5 percent of the gross amount of the dividends if the beneficial owner of the dividends owns 10 percent or more of the voting shares of the paying company for at least six months, or (c) the applicable tax rate is 15 percent in all other cases (Article 10).
In addition, (ii) as for interest and royalties, while both of them were generally subject to a tax of 10 percent in a source country under the Former Agreement, the New Agreement makes both payments tax exempt (Articles 11 and 12).
It should be noted that the benefits set forth in (i) and (ii) above are subject to satisfaction of the requirements under the limitation on benefits clause as described below and the completion of certain procedures as provided in Article 27.