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NTA Signs Tax Treaty with Netherlands

November 2010
International Tax Review
Akira Akamatsu, Jun Sawada

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On August 25, Japan and the Netherlands signed the new convention for the avoidance of double taxation and the prevention of fiscal evasion for taxes on income (new tax treaty) in Tokyo, revising the convention that was signed back in 1970.

Arbitration clause
The most important development in the new tax treaty is the introduction of the arbitration clause, first to be prescribed among the 48 conventions covering 59 countries that Japan enters into. The arbitration clause in the new tax treaty is included in paragraph 5 of article 24 (mutual agreement procedure). The clause is introduced in line with the arbitration clause of the OECD Model Tax Convention (paragraph 5 of article 25). The arbitration clause binds the two countries to agree on the arbitration process, when the competent authorities are unable to reach an agreement to resolve a double taxation case within two years from the presentation of the case to the competent authority of the other contracting state, upon the taxpayer's request. The arbitration clause also prescribes that the decision made in the arbitration process is binding to both countries, notwithstanding any time limits in the domestic laws, unless the taxpayer involved does not accept the mutual agreement that implements the arbitration decision.

Details of the arbitration process are prescribed in paragraph 12 of the protocol to the new tax treaty. Protocol article 12 prescribes that the two countries shall establish a procedure to ensure that an arbitration decision will be implemented within two years from a request for arbitration. The implementing arrangement is also established generally in line with the procedures prescribed in the OECD Commentary.

The NTA has officially announced that the request for mutual agreement procedures in conjunction with the application of bilateral APAs will not be subject to the arbitration procedures. Furthermore, recent tax assessments indicate that the NTA is taking a strong position that donation taxation on intercompany transactions, will not be subject to mutual agreement procedures. Accordingly, from the NTA's perspective, even in case of a double taxation situation as a result of an intercompany donation taxation, the case will not be part of a mutual agreement procedure, which also takes away the path for a possible resolution in the arbitration procedure. The NTA asserts that since donation taxation is a deductibility issue under the domestic tax law, it should not be treated as taxation not in accordance with the provisions of a tax treaty.

Other developments
In line with other conventions recently negotiated, the new tax treaty reduced the maximum withholding tax rates applicable to dividends and royalties; a zero withholding tax rate on dividends in the case where 50% or more of the shares of the dividend paying company are held by a qualifying treaty resident shareholder, and a 5% rate in the case where at least 10% of the shares are held by a qualifying treaty resident shareholder.

The new tax treaty also provides for a 10% withholding tax rate in the case where less than 10% of the shares of the dividend paying company are held by a treaty resident shareholder. The maximum interest withholding rate under the new treaty remains to be at 10%. However, a 0% rate is provided in the case of interest paid to certain financial institutes. Under the new treaty, the maximum withholding rate on royalties is reduced to zero from 10%.

Upon ratification, the new treaty is expected become effective in January 2011.