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New Tax Treaty Between Japan and The Netherlands Approved by Dutch Parliament
A new tax treaty between Japan and the Netherlands was signed in 2010. The new tax treaty provides a number of benefits for Japanese companies investing in or through the Netherlands. Due to political developments in the Netherlands, the approval of the new treaty by Dutch parliament has taken more time than expected, however, both chambers of the Dutch Parliament have now approved the treaty. The new treaty will therefore come into force as of 1 January 2012. Taxand Netherlands examines the key benefits of the treaty to multinationals operating between Japan and the Netherlands.
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 (subject to other specific requirements such as a 6 month holding period and the limitation of benefits requirements). Under the current treaty a minimum 5% dividend withholding tax rate applies. In order to qualify for the benefits of the treaty certain strict criteria need to be met. Current structures should be reviewed in order to determine whether the new lower withholding tax rates apply and whether the limitation of benefits requirements are met.
Due to the introduction of the participation regime in the Japanese tax regime, the current 5% dividend withholding tax cannot be credited against Japanese taxable income and therefore results in a significant tax cost upon repatriation of profits. The new treaty will eliminate this cost (provided that the requirements for the 0% rate are met). The introduction of the 95% participation exemption regime in Japan and the elimination of dividend withholding tax under the new treaty will make it more attractive for Japanese companies to repatriate dividends to Japan. The difference between the Dutch corporate tax rate (25%) and the corporate tax rate in Japan (approx. 40%) may however make it more attractive to retain cash in the Netherlands instead of repatriating it to Japan.
The withholding tax on royalties will also be reduced to 0% (from 10%). This is only relevant for royalty payments by Japanese companies to a Dutch company as the Netherlands does not levy royalty withholding tax. The interest withholding tax rate will also be reduced to 0% for qualifying financial institutions such as banks (note that the Netherlands does not levy withholding tax on interest).
The new treaty and especially the proposed new withholding tax rates will strengthen the position of the Netherlands as a good investment route for Japanese companies.
Your Taxand contacts for further queries are:
Dr Willem Visser 't Hooft
T. +31 20 757 09 03
T. + 31 20 757 09 05