The Agreement between the Kingdom of Spain and Japan for the elimination of double taxation on income tax and the prevention of tax evasion and avoidance and its Protocol (hereinafter referred to as the Agreement) was published in the Official Gazette on 26thFebruary 2021. In spite of entering into force on 1st May 2021, the most important implications did not come into effect until 1st January 2022.

The Agreement completely replaces its predecessor, which has been in force since 1974, and which in Spain, affects Income Tax, Corporate Tax, and Non-Resident Income Tax, and in Japan affects Income Tax, Corporate Income Tax, Special Income Tax for reconstruction and the Local Tax on Corporate Income.

Those Spanish companies which wish to invest in Japan, or vice versa, will be interested to know that the Agreement is a prosperous context for cross investment, revising downwards tax rates provided for in the previous agreement and establishing exclusive premises for taxation in the State of residence of the investor. The main new developments introduced by the Agreement and which come into play with regard to investment between both States are as follows:

  • For the collection of dividends (article 10), the Agreement is especially beneficial for companies resident in Spain or Japan which have a subsidiary in the other State. Thus, when a subsidiary pays dividends to its parent company, the subsidiary no longer has to apply 10% withholding tax as required by the previous agreement, since said dividends will only become taxable in the country of residence of the parent company when the latter may possess more than 10% of the voting rights of the subsidiary for a period of twelve months. When the investor is a natural person or a legal entity which does not fulfil the aforementioned requirement, the tax burden is reduced from the 15% established in the previous agreement to 5%.
  • Interest (article 11), would be taxable exclusively in the State of residence of the effective beneficiary. In this way the obligation to retain at source which existed in the previous agreement is eliminated, for which the tax rate was 10%. That said, when interest is determined with reference to income, sales, revenue, profit or other cashflow from the debtor or person related thereto, or to dividends, among others, it shall be taxable also in the source State at the rate of 10%.
  • Fees (article 12), in the same way as with interest, the Agreement establishes that fees are taxable only in the State of residence of the beneficiary, therefore it would not be necessary to apply the withholding tax of 10% provided for in the previous agreement.

In summary, with the new Agreement, investors will benefit from a reduction in the tax rates in the State of origin of the income to the point that, in some cases, such income will no longer be taxable in that State, thus eliminating the obligation to withhold taxes at source. This will undoubtedly contribute to the development of economic relations between Spain and Japan and will encourage companies from both countries to strengthen their commercial ties.

 

 

Joan Lluís Rubio

Vilá Abogados

 

For more information, please contact:

va@vila.es

 

4th February 2022