International tax analysisdoes not end with domestic law.If Japan has a tax treaty with the other country, that treaty may contain rules differing from domestic law.

Reaching a Conclusion Solely from Japanese Law Can Lead to Mistakes.

Definition of a Tax Treaty

Article 2 of the Act on Special Provisions of the Income Tax Act, the Corporation Tax Act, and the Local Tax Act Incidental to Enforcement of Tax Treaties and Other International Agreements defines the terms.

(i)tax treatyA treaty concluded by Japan for the avoidance of double taxation or prevention of tax evasion with respect to taxes on income.

(ii)Tax Treaties and Other AgreementsTax treaties and agreements on mutual administrative assistance in tax matters (… containing provisions for mutual exchange of information concerning tax assessment or collection, assistance in tax collection, …).

(iii)Treaty Partner Countries and Other PartiesA contracting state or party to a tax treaty or other agreement other than Japan.

(iv)Treaty Partner Country resident and Similar Persons　……Non-resident… or …foreign corporation… who is treated as a resident or corporation of the treaty partner country or other party under the treaty.

(v)Maximum Tax RateThe specified tax rate or percentage where a tax treaty limits taxation of a resident or similar person of the treaty partner to an amount calculated at that rate or percentage.

Tax Treaties and Other Agreements Also Include Information Exchange and Collection Assistance Agreements.They Are Not Only About Double Taxation.

Why Does the Treaty Take Precedence?

Article 98, paragraph (2), of the Constitution of Japan.

The treaties concluded by Japan and established laws of nations shall be faithfully observed.

Individual tax statutes then expressly confirm the priority of treaty provisions.

The Wording of Article 162, Paragraph (1), of the Income Tax Act

Where a tax treaty contains provisions concerning domestic-source income that differ from the preceding Article, for persons entitled to that treaty, domestic-source income shall, notwithstanding that Article,be determined under the treaty to the extent of those differing provisions.

The First Point to Check: Treaty Terms Differ by Country

Tax treaties for avoiding double taxation are generally bilateral.They Do Not All Have Identical Terms.

• The generation of treaty wording varies with the date of conclusion.
• Maximum tax rates differ.
• The scope of permanent establishments differs.
• The presence of limitation-on-benefits (LOB) provisions and a principal purpose test (PPT) also differs.
• Whether the treaty has been modified by the BEPS Multilateral Instrument (MLI) also differs.

A Tax Conclusion Cannot Be Reached Until the Other Country Is Identified.

Where to Find the Authentic Treaty Text

The authentic texts of tax treatiesare not included in the e-Gov Law Search database(which contains domestic legislation such as the Tax Treaty Implementation Act).

• Authentic Treaty Text — Ministry of Foreign Affairs Treaty Database
• Content After MLI Application — Ministry of Financematerials published by

Check the Authentic Text Rather Than Relying on Figures in Commentary Articles.

Advance Notification Is Required for Relief at the Withholding Stage

Article 2, paragraph (1), of the Ministerial Order implementing the Tax Treaty Implementation Act provides that a treaty partner resident or similar person seeking reduced or exempt withholding on dividends and similar payments must,for each withholding agent,after the treaty takes effect,by the day before the first payment is received,submit the notification through the withholding agent. Separate rules apply to bearer shares, bonds, and similar instruments.

Without Notification, Domestic Tax Rates Apply at Payment.However, the treaty benefit itself is not lost. Paragraphs (8) and (9) provide fora refund claimThis is the prescribed penalty.

For treaties with limitation-on-benefits clauses, Article 9-2 and subsequent provisions of the same Ministerial Order separately prescribe notifications and related procedures for persons claiming benefits under those clauses.

Points that require care in practice

• With Which Countries Does Japan Have Treaties?Lists are published by the Ministry of Finance and Ministry of Foreign Affairs.
• If Both Countries Treat You as Resident, Where Are You Resident for Treaty Purposes?Treaties contain tie-breaker provisions, but the mechanisms differ for individuals and corporations; some treaties require agreement between the authorities.
• Can a Company in a Third Country Be Used to Obtain Treaty Benefits?LOB provisions and the PPT become relevant.
• What Happens to Income Not Specifically Mentioned in the Treaty?Many treaties contain an “Other Income” article, but its presence and terms vary by treaty.
• What If You Forget to Submit the Notification?Consider a refund claim under Article 2, paragraphs (8) and (9), of the Ministerial Order.
• Can You Choose Whichever Is More Favorable: the Treaty or Domestic Law?That depends on how the treaty provisions are interpreted.

The Outcome Depends on What the Treaty Says, Not Merely Whether One Exists.Consult us once the other country has been identified.

Legal basis

• Article 98, Paragraph (2), of the Constitution of Japan
• Articles 1, 2, and 3-2 of the Act on Special Provisions of the Income Tax Act, the Corporation Tax Act, and the Local Tax Act Incidental to Enforcement of Tax Treaties and Other International Agreements
• Article 2 and Article 9-2 onward of the implementing Ministerial Order (Notifications and Related Procedures for Persons Claiming Benefits Under Benefit Provisions)
• Article 162 of the Income Tax Act and Article 139 of the Corporation Tax Act (Domestic-Source Income Where a Tax Treaty Contains Different Provisions)
• Article 2, paragraph (1), item (viii)-4, of the Income Tax Act and Article 2, item (xii)-19, of the Corporation Tax Act (Provisos to the Definition of Permanent Establishment)

Consult the Ministry of Foreign Affairs treaty database for authentic treaty texts. An individual determination requires confirmation of the other country and transaction details.