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New Beneficial Tax Treaty between Japan and the Netherlands

Netherlands
On the 18 December 2009 the Netherlands and Japan agreed 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. Taxand Netherlands discuss why it's important for Japanese businesses to take advantage of the treaty. The official signing of the new tax treaty is expected by the early summer of 2010, by which time the official text will be made publicly available. It is expected that the new Convention will become 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 will be as follows (subject to amendments on 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:

 

Dividends

Dividends

Interest

Royalties

 

Qualifying shareholders

Other

 

 

Current treaty

5% (25% or more)

15%

10%

10%

New treaty

0% (50% or more)
5% (10% or more)

10%

0% (a.o. financial institutions)
10% (others)

0%

  • strict "limitation of benefits" rules will be introduced based on the current treaty between the Netherlands and the US. Details can be provided upon request

  • in the new treaty Japan explicitly has the right to tax income and gains from sleeping partners in a "Tokumei Kumiai" or similar contract


 

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 to ensure continued success. The proposed new treaty will introduce welcome changes to sustain current investment and attract future trading by Japanese companies.

Recently there have been political discussions proposing to decrease the Netherland's corporate income rate to 25% or less, as this would have created Japanese CFC issues for investments held in or through the Netherlands. If it was 25% CFC issues would be problematic for inbound investments Japanese multinationals should seriously look at the Netherlands as an operational base. This is one of the reasons that the Netherlands now has a 25.5% corporate income tax rate. The government clearly sees Japanese investment as worthwhile given the current corporate tax rate is 25.5%.

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

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