The new Netherlands Japan tax treaty

September 14, 2010  |  International Taxation, Tax Treaties
Signing ceremony for the new Netherlands Japan tax treaty

Signing ceremony for the new Netherlands Japan tax treaty

On August 25th 2010 the new Japan Netherlands tax treaty (below the ‘Treaty’) was signed between Mr. Koichi Takemasa, State Secretary for Foreign Affairs of Japan and His Excellency Dr. Philip De Heer, Ambassador Extraordinary and Plenipotentiary of the Kingdom of the Netherlands to Japan.

Entry into force

It is expected that the ratification process in the Netherlands will be completed in 2011, with the treaty entering into force in 2012.  However given that the timing of entry into force of the treaty depends on an uncertain timetable for its ratification by the Dutch and Japanese parliaments readers may wish to check the Dutch tax authorities English news pages for updates on the ratification process.

Modern treaty

The Treaty has many of the features of Japan’s more “modern” treaties, such as those signed with the US, UK, France and Australia, including a limitation of benefits clause and recognising the fiscal transparency of entities formed in Japan, the Netherlands and third-countries for applying Treaty benefits when certain conditions are met.  As discussed further below, the Treaty also changes the existing taxation of tokumei kumiai investments.

Treaty Resources

Below are links to the new Treaty.


A few points of interest


Pension funds and certain tax exempt charitable, educational and similar public institutions are treated as resident for treaty purposes and hence may be able to claim Treaty benefits.

The Treaty also includes a new tie breaker clause to allocate the tax residency of otherwise dual resident companies to a single jurisdiction.  This new test refers to the “…place of head office or main office…” as determining tax residence, similar to the wording under Japanese domestic law and different from the more conventional OECD standard term, referring to the “…place of effective management…”.  Japanese domestic law has never considered the location of management to be a factor in determining tax residence.

Pass-through entities

The Treaty gives recognition to pass through treatment for entities meeting defined conditions, allowing the members of those entities to receive benefits under the Treaty provided the conditions are met.  See the following link for which types of Japanese entities are treated as corporations and which as pass-through.

Where the members of an entity are resident in either Japan or the Netherlands and those members are seeking Treaty benefits in respect of a pass-through entity formed in a third country receiving income sourced in the other jurisdiction, then such Treaty benefits may be granted by the other jurisdiction when it has signed a convention with that third country that allows effective information exchange in relation to tax matters.


A full exemption from dividend withholding tax is now available in respect of dividends from a 50 per cent or more voting share holding that has met the conditions of a six month holding period test.  A 5 per cent rate can apply for shareholdings from 10 percent up to the 50 per cent required for complete exemption.  Pension funds may be able to claim full exemption from withholding tax on dividends.

A further feature of the new Treaty will be to allow Japanese companies to apply the Japanese foreign dividend exclusion rules where the 10% threshold is met.  Refer to this article for more details on how tax treaties interact with these rules.

Tokumei kumiai

Under the former treaty, distributions from tokumei kumiai contracts were treated as other income taxable only in the Netherlands (see this article on the application of tax treaties to tokumei kumiai distributions).  This exemption from tax has been subject to audit scrutiny and litigation in Japan that has yet to proceed through the final stages of the court process.

Under the new Treaty, Japan is able to apply withholding tax to tokumei kumiai distributions, at the domestic tax rate, which is currently 20 per cent. Please feel free to download the table in the following link showing the taxation of tokumei kumiai distributions under different tax treaties (not updated for the Netherlands at the time of writing).

Capital gains

A further “modern” feature of the Treaty is allowing the taxation of capital gains on certain dispositions of shares or other interests in entities that derive at least 50 per cent of their value directly or indirectly from immovable property by the jurisdiction in which the immovable property concerned is situated.  This article will likely most often apply to gains on the sale of real estate SPVs, allowing the country in which the real estate is situated to tax the shareholders of such an SPV on the gains on its sale.

Limitation of benefits

The Treaty also includes a comprehensive limitations of benefits clause.  The clause defines certain ‘Qualified Persons’ who, judging from their nature, would not normally be expected to have established the entity claiming Treaty benefits in one of the treaty countries for treaty shopping purposes.  Qualified Persons include:

  • individuals
  • certain governmental or quasi governmental bodies in either of the two states
  • companies listed in Japan or the Netherlands or on certain other major exchanges where the primary place of management and control of the taxpaying entity is the same as the jurisdiction of the exchange concerned
  • regulated banks, insurance or securities companies
  • Companies where at least 50 per cent of the voting power is held by other Qualified Persons in either of Japan and the Netherlands

If you are not a Qualified Person you may still be able to claim Treaty benefits depending on meeting criteria under one of the following three tests:  An “equivalent beneficiary” test (conceptually, showing that the persons owning or controlling the entity claiming the benefits would have been able to claim equal or better benefits under a different treaty they could otherwise apply with Japan or the Netherlands;  a “business” test – the recipient of the income is carrying on certain defined operating businesses in its country of residence;  a “headquarters” test, which is intended to allow Treaty benefits to defined headquarters entities of multinational groups.  One suspects this last test will allow more Dutch companies to qualify for Treaty benefits than Japanese.

Finally a person who cannot qualify for Treat benefits through passing any of the above tests would be able to appy for a determination that they can claim Treaty benefits provided they can show “…the conduct of [their] operations did not have as one of the principal purposes the obtaining of such benefits…”

Exchange of Notes

The Exchange of Notes refers to some other items well worth  attention.  In particular it includes:

  • a listing of funds and of pension institutions in existance at the time of the Exchange of Notes whose regulations give rise to entities included in the scope of the term “pension funds” used in the Treaty.

  • recognition that OECD principles will apply to the interpretation of the term “beneficial owner” where used in Articles 10, 11,12 and 20 of the Treaty (Dividends, Interest, Royalties and Other Income respectively).

  • Elucidation of the term “…adequately subject to tax…” for the purposes of applying the Pensions Article 17 of the Treaty.

  • A requirement of one competent authority of a Contracting State to notify the other prior to denying treaty benefits under Article 21 para 7, which is a provision allowing a taxpayer to apply for the benefits of the convention on the grounds that “…the conduct of its operations did not have as one of the principal purposes the obtaining of such benefits…”.

Investor’s next steps

Investors from one country into the other would be well advised to follow when the Treaty may enter into force. If the treaty was ratified ahead of schedule effective in 2011 this would allow very little time to understand how the Treaty may apply to an investment from one country into the other.

Points investors should probably look out for include: Whether or not their investing entities which are claiming benefits under the old treaty would still qualify for Treaty benefits given the new limitations of benefits clause. The timing of distributions from tokumei kumiai investments or other sources of Japanese or Dutch income to understand whether the new or old treaty may apply. Whether or not any contracts relating to their investments into one country from the other have terms addressing a change in tax law that may be triggerred by the coming into force of the new Treaty.

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