New tax treaty with Japan will apply as from 1 January 2020
On 19 January 2019, the Belgium - Japan Income Tax Treaty will enter into force. The treaty will apply, in respect of withholding taxes, as from 1 January 2020 and, in respect of income taxes, to taxable periods starting as from 1 January 2020. The new treaty will replace the Belgium - Japan Income Tax Treaty of 1968, as amended by the 1988 and 2010 protocols.
The maximum rates of withholding tax are:
- 10% on dividends generally, but 0% if the receiving company owns directly or indirectly at least 10% of the company paying the dividends. The rate is also 0% if the recipient is a pension fund;
- 10% on interest, but 0% on interest paid by a company owned by a company of the other contracting state. The rate is also 0% if the recipient is a pension fund; and
- 0% on royalties.
The treaty generally follows the OECD Model. Deviations from the OECD Model include the following:
- article 5 on permanent establishments is based on the proposed version as provided for in the final report on BEPS Action 7;
- the provision on business profits is in line with article 7 of the OECD Model 2010 concerning the Authorized OECD Approach (AOA);
- a provision is included that pensions are also taxable in the source state;
- a limitation on benefits (LOB) clause is included.
Belgium applies both the exemption-with-progression and the credit methods to avoid double taxation. Dividends are exempt if the conditions of the participation exemption are met or if the subject to tax criterion is not met if the distributing company carries out an active business in Japan. No exemption is granted for PE profits which are exempt in Japan due to loss relief.
Article 4 of the protocol regulates that an item of income is effectively taxed in Japan where such item of income is subject to tax in Japan and does not benefit from an exemption from tax therein. Furthermore, an item of income is taxed in Japan where such item of income is subjected in Japan to the tax regime that is normally applicable to such item of income according to the tax laws of Japan