Background
The convention between Australia and Japan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (the 2008 Japanese Convention), signed in Tokyo on 31 January 2008 replaces the existing agreement between Australia and Japan which was signed in 1969, and its associated protocol.
The 2008 Japanese Convention entered into force on 3 December 2008.
For Australian withholding tax on income derived by a non-resident, the 2008 Japanese Convention has effect in relation to income derived on or after 1 January 2009. For other Australian taxes covered by the 2008 Japanese Convention, the convention has effect for any taxable year beginning on or after 1 July 2009.
For Japanese taxes covered by the 2008 Japanese Convention, the convention has effect in respect of income withheld at source for amounts taxable on or after 1 January 2009. For other Japanese taxes covered by the 2008 Japanese Convention, the convention has effect for any taxable year beginning on or after 1 January 2009.
Income from real property may be taxed by the country in which the property is situated. Income from real property for these purposes includes rights to explore and mine natural resources [Article 6].
Business profits (including income derived from the performance of professional services and other non-employment activities) are taxable only in the country of residence of the recipient, unless they are derived by a resident of one country through a permanent establishment in the other country. In that instance, the other country may tax the profits attributable to the permanent establishment. These rules also apply to business trusts [Article 7].
Profits derived from the operation of ships and aircraft in international traffic are generally to be taxed only in the country of residence of the operator. However, profits of an enterprise derived from the operation of ships or aircraft may be taxed in the country where the ship or aircraft is operated to the extent that those profits are derived directly or indirectly from ship or aircraft operations confined solely to places in that country [Article 8].
The Associated Enterprises Article authorises the reallocation of profits between related enterprises in Australia and Japan on an arm's length basis. Where a reallocation of profits is made to adjust upwards the profits of an enterprise of one country, and the competent authorities agree to the adjustments, the other country shall make correlative adjustments [Article 9].
Dividends, interest and royalties may generally be taxed in the country in which the beneficial owners of such income are residents and may also be subject to tax in the country from which such income is paid up to certain limits [Articles 10 to 12].
In the case of dividends:
- no source country tax is payable on dividends where the beneficial owner of the dividends is a company that is resident of the other country and has owned shares representing at least 80% of the voting power of the company paying the dividends for the preceding 12 months (subject to certain additional conditions) [Article 10, paragraph 3]
- a 5% rate limit on source country tax applies to dividends where the beneficial owner of the dividends is a company that is a resident of the other country and holds directly at least 10% of the voting power of the company paying the dividend [Article 10, subparagraph 2(a)], and
- a 10% rate limit on source country tax applies to all other dividends [Article 10, subparagraph 2(b)].
In the case of dividends beneficially owned by a resident of Australia paid by a company that is a resident of Japan and is entitled to a deduction for dividends, taxation of the dividends by Japan shall not exceed:
- 15% where more than 50% of the assets of the company paying the dividend consist, directly or indirectly, of real property situated in Japan [Article 10, subparagraph 4(a)]; and
- 10% for all other dividends [Article 10, subparagraph 4(b)].
The dividend rate limits apply to the gross amount of the dividend and to both franked and unfranked dividends.
Distributions of income, profits or gains by an Australian 'real estate investment trust' (REIT) may be taxed in both countries, but the Australian tax charged on such distributions that are beneficially owned by a resident of Japan is limited to 15% of the gross amount of the distributions [Article 10, paragraph 7].
Source country taxation on interest beneficially owned by a resident of the other country is limited to 10% [Article 11, paragraph 2]. However, no tax will be chargeable by the source country on interest derived by and beneficially owned by:
- the other country or a political subdivision or local authority thereof, by any other body exercising governmental functions in that country, by the Bank of Japan or by the Reserve Bank of Australia [Article 11, subparagraph 3(a)]
- a financial institution that is unrelated to and dealing wholly independently with the payer [Article 11, subparagraph 3(b)], and
- the Australian 'Export Finance and Insurance Corporation', a public authority that manages the investments of the Australian 'Future Fund', the Japan Bank for International Cooperation, the Nippon Export and Investment Insurance, or by any similar institution as may be agreed through an exchange of diplomatic notes between the two countries [Article 11, subparagraph 3(c)].
Source country tax of royalties beneficially owned by a resident of the other country is limited to 5% [Article 12, paragraph 2].
The definition of 'royalty' has been amended to extend to payments for forbearance in respect of the specified kinds of rights, and to exclude payments or credits made as consideration for the use of, or right to use, industrial, commercial or scientific equipment. Royalties will not include payments for the use of spectrum licences [Article 12, paragraph 3 and item 16 of the Protocol].
Income, profits or gains from the alienation of real property and from the alienation of shares or other interests in land rich entities, or from the alienation of business assets of permanent establishments or assets otherwise attributable to a permanent establishment may generally be taxed by the country in which the property or permanent establishment is situated. Gains of a capital nature arising from the alienation of other property will generally be taxable only in the country of residence [Article 13].
Income from employment (other than directors' fees, pensions and annuities, remuneration for government service or the income of entertainers and sports persons) is taxed in the country of residence of the employee, unless the employment is exercised the other country, in which case, the income generally may be taxed in the country where the services are performed. However, where the services are performed during short visits to one country by a resident of the other country (who is employed by a resident of that other country) the income will generally be exempt in the country visited [Article 14].
Directors' fees and other similar payments derived by a person in his or her capacity as a member of a board of directors of a company may be taxed in the country in which the company is a resident [Article 15].
Income derived by entertainers and sportspersons from their entertainment or sports activities may be taxed in the country in which the activities are performed [Article 16].
Pensions and annuities will generally be taxed only in the country of residence of the recipient [Article 17].
Salary and wages from government service will generally be taxed only in the country that pays the remuneration. However, the remuneration shall be taxed only in the other country if the services are rendered in that other country by a resident of that other country and that person is either a national of that other country, or did not become a resident of that other country solely for the purpose of rendering the services [Article 18].
Payments made from abroad to visiting students or business apprentices for the purpose of their maintenance, education or training will be exempt from tax in the country visited provided the student is (or was immediately before visiting) a resident of the other country and is visiting solely for the purpose of their education. In the case of business apprentices, the exemption is limited to a period not exceeding one year from the date the person begins their training in the visited country [Article 19].
Income, profits or gains derived by a sleeping partner in a 'sleeping partnership (Tokumei Kumiai)' contract or similar contract may be taxable in the country where the income, profits or gains arise and according to the laws of that country [Article 20].
Other income (not dealt with by other articles, including income arising in countries other than Australia and Japan) derived by a resident of one country is taxable only in the country of residence, unless it is derived from sources in the other country in which case it may also be taxed in that other country [Article 21].
Source rules effectively deem income, profits or gains derived by a resident of a country which may be taxed in the other country under the 2008 Japanese Convention to have a source in that other country [Article 22].
The Limitation on Benefits Article limits the benefits under the 2008 Japanese Convention to specified qualifying persons in the case of specified kinds of business profits, dividends, interest and income from the alienation of property [Article 23].
The Limitation of Relief Article limits tax relief under the 2008 Japanese Convention for income or gains taxed in the other country on a remittance or receipts basis (and not by reference to the full amount of the income or gains), or exempt from tax by virtue of temporary residence [Article 24].
Double taxation relief for income which is taxable by both countries in accordance with the 2008 Japanese Convention is required to be provided by the taxpayer's country of residence as follows (subject to the domestic law allowing credit for tax paid in the other country):
- in Australia, by allowing a credit against Australian tax payable for the Japanese tax on income derived by a resident of Australia from sources in Japan [Article 25, paragraph 2], and
- in Japan, by allowing a credit against Japanese tax for the Australia tax on income derived by a resident of Japan from Australia [Article 25, paragraph 1].
Australia's double tax relief obligation is effected by the general foreign tax credit (or foreign income tax offset) provisions or relevant exemption provisions under Australia's domestic law.
Rules in the 2008 Japanese Convention will protect nationals and businesses from tax discrimination in the other country [Article 26]. However, the article does not apply to anti-avoidance rules (including thin capitalisation, dividend stripping, transfer pricing and controlled foreign companies measures), rebates or credits for dividends paid by resident companies, research and development concessions, consolidation rules or capital gains deferral rules.
Consultation and exchange of information between the tax authorities of both countries is authorised by the 2008 Japanese Convention. The convention authorises and requires Australia to exchange information where the information relates to taxes administered by the Commissioner of Taxation [Article 28].
What to read/do next
More information relating to this and other Australian tax treaties can be found on the Treasury website
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Last Modified: Friday, 27 February 2009