July 27, 2021
Japan and Switzerland sign Tax Convention Protocol
The Government of Japan and the Swiss Federal Council signed the Protocol Amending the Convention between Japan and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income (the Protocol) in Bern on 16 July 2021.
This Protocol amends part of the existing Convention, which entered into force in 1971 and was partly amended in 2011 (the Convention). It is expected that, while eliminating double taxation and preventing international tax evasion and tax avoidance, this Protocol will promote further mutual investment and economic exchanges between the two countries.
This Alert summarizes the key provisions of the Protocol relevant to multinational corporate taxpayers.
Taxation of business profits (Article 7)
The business profits attributable to a permanent establishment (such as a branch) of an enterprise of one of the two countries situated in the other country which may be taxed in that other country shall be calculated by comprehensively recognizing internal dealings between its head office and branches taking into account the functions performed, assets used and risk assumed by the enterprise through the permanent establishment.
Taxation of dividends, interest, and royalties (Articles 10, 11 and 12)
Taxation of dividends, interest and royalties in the source country will be subject to reduced maximum rates or exempted as follows:
Prevention of Abuse of the Convention (Protocol paragraph 1)
The Convention already contains a similar principal purpose test (or PPT) under the Protocol paragraph 1, but the language will be amended in accordance with recent OECD2 BEPS3 developments.
The Convention contains another anti-abuse provision generally referred to as the limitation on benefits (or LOB) under Article 22A, to which there is no material amendment.
Arbitration proceedings in mutual agreement procedure (Article 25)
Where taxation not in accordance with the provisions of this Convention has not been resolved through the consultation between the tax authorities of the two countries within three years, the unresolved issue will be resolved pursuant to a decision of an arbitration panel composed of third parties, which shall generally be binding on both countries.
Entry into force
After the approval in accordance with the domestic procedures of the two countries (in the case of Japan, approval by the Diet is necessary), the Protocol will enter into force on the 30th day after the date of exchange of diplomatic notes indicating such approval.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., Tokyo
Ernst & Young LLP (United States), Japanese Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York