11 January 2019 Belgium and Japan tax treaty to enter into force On 20 December 2018, Belgium and Japan exchanged the instruments for the Income Tax Treaty and Protocol (the Revised Treaty), signed on 12 October 2016,1 to enter into force.
Although the Revised Treaty is not listed by Belgium or Japan as a Covered Tax Agreement for the purposes of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), the Revised Treaty directly implements some of the MLI features (e.g., new PE features, LOB/principal purpose tests). Paragraph 3 of Article 1 states that income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State would be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that Contracting State, as the income of a resident of that Contracting State. The term "fiscally transparent" means that, under the tax law of a Contracting State, income or part of the income of an entity or arrangement is not taxed at the level of the entity or arrangement but at the level of the persons who have an interest in that entity or arrangement. Paragraph 2 of Article 4 provides that, in cases where a person other than an individual is a dual resident, the competent authorities of the two Contracting States will seek a determination by mutual agreement of the country of residence based on the place of head office, the place of effective management, the place of incorporation or otherwise constituted and any other relevant factors. In the absence of such agreement, such person will not be entitled to any relief under the Revised Treaty. The Revised Treaty lowers the threshold for creating a PE by revising the scope of the concept of dependent agent PE (Article 5, paragraph 6) and independent agent (Article 5, paragraph 7). This is in line with the recommendations of Action 7 of the 2015 BEPS final reports. The Revised Treaty's taxation on business income attributable to a PE is in line with Article 7 of the AOA. Under the provision, business income attributable to the PE will be calculated based on the arm's-length principle as if the PE were a separate and independent enterprise from its head office.
The Revised Treaty provides exclusive resident country taxation on royalties (currently 10%). The payment for income from a bare boat charter of a ship or aircraft has been removed from the definition of the royalties. The Revised Treaty grants the taxing right to the Contracting State on gains derived from the transfer of shares in a company deriving at least 50% of the value directly or indirectly from immovable property situated in that Contracting State, at any time during the 365 days preceding the transfer, unless the shares are traded on a recognized stock exchange and the resident (including persons related to that resident) owns in aggregate 5% or less of the shares. The current full exemption on gain from a disposition of shares other than those in the preceding sentence is retained. The Revised Treaty grants the taxing rights to Japan for income and gains derived in Japan by a silent partner who is a Belgium resident and a party to a TK or another similar contract. Reflecting the recommendation in the 2015 BEPS final report on Action 6, Article 22 of the Revised Treaty introduces the provisions that set forth the criteria that would determine whether a person is considered as a qualified person (as defined in Paragraph 2 of Article 22) or satisfies any other specified objective tests to be entitled to the benefits (dividends, interest and royalties) in the Revised Treaty. The objective tests are based on characteristics such as legal structure, ownership, or activities reflecting a link between the person and the residence state. The competent authority may still grant benefits to a resident of Contracting State even if the resident fails to be a qualified person or satisfy one of the objective tests. Paragraph 9 of Article 22 of the Revised Treaty provides that a benefit under the Revised Treaty will be denied if obtaining the benefit under the treaty is one of the principle purposes of any arrangement or transaction that would result directly or indirectly in that benefit. Paragraph 5 of Article 25 explicitly provides for mandatory arbitration proceedings, in which the cases not being resolved between the tax authorities of the Contracting States will be resolved within two years pursuant to decisions made by third-party arbitrators if the taxpayer requests. 1 See EY Global Tax Alert, Belgium and Japan sign revised income tax treaty, dated 17 October 2016. Document ID: 2019-0105 |
