On 28 September 2016 the mutual notifications necessary for the entry into force of the amended Japan- Germany Tax Treaty signed on 17 December 2015 were completed. The new Tax Treaty is applicable since January 2017 and replaces the previous Tax Treaty from 1966. The structure follows generally the OECD Model Tax Convention.

What is new?

Residency of an individual in one of the Contracting States entails the legitimacy of the Tax Treaty

If a person is tax resident in Japan and in Germany, in the previous DTA the authorities had to come to a mutual agreement. The new DTA follows the OECD Model tax Convention in this point, too. Therefore the residence article provides ‘tie-breaker’ rules for determining in which of the two states an individual who is dual-resident under the respective domestic laws should be treated as resident for the purposes of the agreement.

The rules comprise the following series of tests to be applied successively until residence for the purposes of the agreement is allocated to Japan or Germany:
• permanent home
• centre of vital interests
• habitual abode
• nationality

Dividend payment: Reduction of the withholding tax rates
The withholding taxes on dividend payment were partly lowered. Instead of 15% withholding tax on basis of the past DTA, the withholding tax is reduced to 0% for a minimum shareholding amount of 25%, if the holding time is minimum 18 months. If the minimum shareholding amount is less than 25% but at least 10% and the holding time of the shares is at least six months, the withholding tax is reduced to 5%. In all other cases, the withholding tax is still 15%.

Interest and royalties
Interest and royalties can only be taxed in the country, where the beneficial owner is resident. A withholding tax is no longer provided.

But there is an exemption, if the interest is based on profit (profit participation). In this case, the source country can tax the interest payment, too. If Germany is the source country an additional prerequisite is that the interest payment is tax deductible for the payer.

As in other DTAs, that are based on the OECD Model Tax Convention, the interest and royalty article is only applicable for the payments that are in accordance with the arm´s length principle.

Capital gains

Until the new DTA is was possible to have Real Estate in a corporation and to sell the shares of this Real Estate Corporation and the taxation right of the country where the real estate is situated was totally restricted. With the new DTA, the country, where the real estate is situated can tax the capital gain of the sale of the shares, if the total assets of the corporation are more than 50%.

Prevention of double taxation

If Japan is the residence state, double taxation is prevented by using the tax credit method.

If Germany is the residence state, the exemption method is applicable in most cases.

Totally new is a switch-over-clause. This means Germany switches from the exemption to the tax credit method, in case Japan subsumes the type of income into another DTA article than Germany or if Japan could tax the income on basis of the DTA but effectively does not tax this income.

Exchange of information

The new DTA will lead to an expansion of the information exchange.

Conclusion

As the economic links between Japan and Germany are tight, the new DTA should be a good basis to avoid double taxation scenarios. This might lead to an increase of mutual investments.