Understanding the Singapore-Japan Double Taxation Agreement
Singapore has long been an attractive destination for Japanese enterprises of all sizes, and with the growth of Southeast Asia as a foreign investment destination, that drive has only increased. Singapore has emerged as the hub of this new, dynamic economic region, and investment is increasing as the Chinese economy’s growth flags and the Japanese economy slows under the weight of an ageing population. With its reputation as a business-friendly environment, combined with an attractive tax regimen, modern infrastructure and a consumer-oriented and English-speaking workforce, it’s no wonder Japanese enterprise is keen to tap the growth of Singapore, with many basing their Southeast Asian operations here.
Singaporean and Japanese economic engagement has accelerated thanks to the signing of the ASEAN Japan Comprehension Economic Partnership (AJCEP) and the Japan and the Republic of Singapore for a New-Age Economic Partnership Agreement (JSEPA). With a trade value nearing S$50 billion in 2014, Japan is Singapore’s sixth largest trading partner, with products such as optical media and electronic being some of the top exports, and integrated circuits and semi-manufacture gold topping the imports list. Japan is Singapore’s fourth largest source of foreign investment and Singaporean investment in Japan has increased in recent years.
Japanese companies of all sizes are increasingly looking to Singapore as a destination for strategic functions. These have included strategic business development, headquarter activities, research & development, and supply chain management and control. With natural disasters affecting the Japanese economy, this trend has gained moment, offering enterprises not only an effective disaster recovery strategy, but a way to meet the requirements of expanding markets while facilitating quicker decision-making and more efficient management.
The Japanese economy’s growing strength has led to many in the global investment community to suggest that increasing attention be paid to the island nation. With Japan set to host the 2020 Olympics, investment is only set to increase.
International investors and enterprises resident in Singapore looking to enter the Japanese market would do well to understand the specifics of the double taxation agreement concluded between the two countries. Read the following article to get an overview of the provisions of the Avoidance of Double Taxation Agreement (DTA) and better strategize your investments and operations in the region.
Specifics of the Singapore-Japan DTA
The Republic of Singapore and the Government of Japan signed the double taxation agreement in 1994 and the agreement has been effective since 1 January 1996, and was amended by a protocol singed on 4 February 2010. Prior to the 1994 DTA, the Government of Japan and the Government of the Republic of Singapore had signed two earlier conventions in 1961 and 1971, also for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxation of income. The 1994 double taxation agreement has superseded these earlier conventions.
Scope of the provisions
The provisions of the double taxation agreement are only to apply to residents of one or both Contracting States. ‘Person’ is here used to refer to either an individual, a company, or any other body of persons who is treated as an entity for the purposes of taxation. The provisions of the double taxation agreement are to apply to all taxes levied on income on behalf of either Contracting State. All taxes imposed on total income, or on elements of income such as taxes levied on gains from the alienation of immovable or immovable property, as well as taxes on the total amount of salaries or wages, are to be covered by the provision.
With regards to Singapore, this double taxation agreement is to cover income tax. With regards to Japan, the
‘A resident of a Contracting State’ refers to any person liable for the payment of tax in a Contracting State by reason of residence, domicile, place of main or head office, place of control or management, or any other similar reason.
Where an individual is a resident of both countries, their tax residency is to be determined by the location of their permanent home. Where their permanent home is in either both or neither Contracting State, their centre of vital interest shall be the determiner. Should both the location of their permanent home and the location of the centre of vital interest be insufficient to determine the individual’s residency, their habitual abode shall be considered. Should this also be insufficient – i.e. the individual does not have a habitual abode in both countries – their nationality shall be used to determine residency. Where they are a resident of both or neither country, residency is to be determined through mutual agreement of the Contracting States.
Where a person other than an individual is a resident of both Contracting States, the respective competent authorities of both countries are to determine the residency status of the person through a mutual agreement that takes into consideration all relevant factors.
Defining permanent establishment
The term ‘Permanent Establishment’ (PE) is used to refer to a fixed place of business through which an enterprise either partly or wholly carries on its business. A PE can be a number of locations and structures, including but not limited to factories, workshops, offices, plantations, farms, drilling rigs and other similar installations, mines, oil wells, quarries and other similar places of natural resource extraction. A construction, assembly or installation project or building site is only to constitute a permanent establishment where it lasts longer than six months.
Supervisory activities undertaken in one Contracting State by an enterprise resident in the other Contracting State for a period of time greater than six months in connection with a construction, assembly or installation project or building site ongoing in the first-mentioned Contracting State are to constitute a PE.
Storage facilities retained for the purposes of goods storage for display, delivery or processing are not to be considered a Permanent Enterprise. Similarly, maintenance of a fixed place for the sole purpose of preparatory or auxiliary activities is not to constitute a PE.
The engagement of an agent of independent status such as a broken or general commission agent for the carrying out of business in one Contracting State shall not amount to a Permanent Establishment. Where the agent’s activities are devoted either wholly or almost wholly to the benefit of the enterprise, and they are acting on behalf of the enterprise and have and habitually exercise an authority to conclude contracts, secure orders and maintain and deliver stock of merchandise or goods on the behalf of the enterprise, they are deemed to be a PE. Should the agent’s actions be auxiliary in nature, they shall not be considered a PE.
A company resident in a contracting state’s being either controlled by company resident in the other contracting state shall not by itself provide ether company a PE in the Contracting State in which it is not resident.
Dividends paid to a resident of one Contracting State by a company resident in the other Contracting State are to be taxed in the Contracting State in which the recipient is resident. The dividend payment may additionally be subject to tax in which the paying company is resident. Where the person receiving the dividend payment is the beneficial owner and not resident in the same Contracting State as the paying company, the tax charged in the country in which the payment arose shall not exceed:
- 5 per cent of the gross dividend amount where the recipient of the payment is a company who owns a minimum of 25 per cent of the capital of the paying company
- 15 per cent of the gross dividend amount in all other situations.
Should the recipient of the payment have a Permanent Establishment in the same Contracting State in which the paying company is resident and the dividend payment is effectively connected to that PE, this provision is not to apply. In this situation, the income is to be treated as a business profit and taxed accordingly.
A company who is resident in a Contracting State and is deriving income from the other Contracting State may only have their undistributed profits taxed in the State in which they are resident even when the undistributed profits consist either partly or wholly of income which arose in the other Contracting State. The other Contracting State is not to levy any tax on dividends paid to persons not resident the other Contracting State by the company.
Due to Singapore’s single tier taxation system, Singapore does not impose a tax on dividends once they have been received.
A ‘withholding surtax’ on dividends has been in effect in Japan since 1 January 2013 in order to raise funds for the restoration of the economy of the affected areas after the Tohoku Earthquake. The Government of Japan shall levy a surtax of 2.1 per cent on withholding tax on dividends for the period from 1 January 2013 to 31 December 2037.
The concessionary tax rate for dividends on listed stocks of 10 per cent for Japanese residents and 7 per cent for foreigners was abolished on 31 December 2013. Normal rates of 20 per cent for Japanese residents and 15 per cent for non-residents have applied since 1 January 2014.
From 1 January 2014, the withholding tax for Japanese residents was set at 20.315 per cent on listed stock dividends and 20.42 per cent for unlisted stock dividends. For foreigners, dividends from listed stocks attract a tax rate of 15.315 per cent and dividends on unlisted stocks attract 20.42 per cent.
The tax rate is composed of both the national tax and the local tax, and the surtax is applicable on the national tax. The Japan-Singapore treaty rates are competitive, and where the treaty rates are below that of the aggregate non-treaty tax rate the surtax is not applicable.
Where a resident of a Contracting State receives interest that arose in the other Contracting State, the interest is to be taxed by the State in which the recipient is resident. Interest may be additionally taxed in the State in which it arose should the recipient be the beneficial owner of the interest. In this situation the tax charged is not to exceed 10 per cent of the gross interest amount.
Interest derived in one Contracting State by the Government of the other Contracting State is to be considered exempt from taxation in the other Contracting State.
Where interest has arisen in a Contracting State on any loan or debenture made to an enterprise presently involved in an industrial undertaking in that Contracting State and paid to a resident of the other Contracting State is to be considered exempt from taxation in the State in which the interest arose. Enterprises are to be approved by the competent authority, and industrial undertaking is to include activities such as assembly, manufacturing, processing, civil engineering and construction, ship-building, breaking and docking, the supply of energy and water, mineral and mining works, agriculture, plantation and fishing & forestry, and any other activities declared as an industrial undertaking.
The above provisions are not to apply in situations where the beneficial owner of the interest has a PE or a fixed base in the same Contracting State in which the payer is resident and where the interest paid is effectively connected with the aforementioned PE or fixed base. Similarly, should interest arise in the same Contracting State in which the payer is resident and the payer has a PE in the same Contracting State in which the beneficial owner is resident and the interest is paid in connection to an indebtedness related to the aforementioned PE, then the interest shall be considered to have arisen in the State in which the recipient is resident (the other Contracting State).
Where the interest paid was in excess of the amount that would otherwise have been paid (due to the existence of a special relationship between the debtor and the recipient), the provision of the treaty is only to extend to that amount that would have otherwise been paid. Any excess is to be taxed according to the respective laws of each Contracting State.
Please note, in the absence of the double taxation agreement, foreigners receiving interest from Japanese residents are subject to a 15 per cent Singapore withholding tax, and Singapore residents to a tax of 20.42 per cent or 15.315 per cent (on bonds and deposits) until 2037.
Royalties paid to a resident of a Contracting State that arose in the other Contracting State may be paid in the first-mentioned State (the State in which they were received). The Contracting State in which the payer of royalties resides is considered to be the State in which the royalties arose.
The Contracting State in which the payer of the royalties is resident may also levy a tax on a royalty payment according to the laws of the State. Where the recipient of the royalties is the beneficial owner, the tax charged by the Contracting State in which the royalties arose is not to exceed 10 per cent of the gross royalty amount. Payments of any kind received as consideration for the right to use, or use of, any trademark, design or model, copyright patent, plan or similar shall be considered to be a royalty.
Should a special relationship exist between the payer and the recipient of the royalty payment that causes the amount of royalties paid to exceed the amount that the parties would have otherwise agreed to pay to in the absence of such a relationship, the provision of the treaty is only the apply to the amount that would have otherwise been agreed to, and not any amount in excess. Any excess amount is to be taxed in accordance with the respective laws of each Contracting State.
The provision of the treaty shall not apply where the recipient of the royalty has a Permanent Establishment or fixed base in the same Contracting State in which the payer is resident, and the royalty payment is effectively connected with the aforementioned PE or fixed base.
Japan imposes a general withholding tax rate on royalties paid to non-residents of 20.42 per cent. In Singapore, the corresponding rate is 10 per cent.
Taxation of capital gains
The Contracting State in which the property is located shall have the right of taxation on any gains resulting from the alienation of immovable property. Where a resident of a Contracting State derives gains from the alienation of movable property that is connected to a Permanent Establishment or fixed base located in the other Contracting States, those gains may be taxed in the other State. Similarly, the Contracting State in which a PE or fixed base is located may impose a tax on any gains made from the alienation of the PE or fixed base.
Should a resident of a Contracting State derive gains from the alienation of aircraft or ships that operated in international traffic – or movable property pertaining to their operation – by an enterprise resident in the same Contracting State, that State shall have the right to taxation.
Gains resulting from the alienation of shares of a company resident in a Contracting State and derived by a resident of the other Contracting State are to be taxed in the first-mentioned State (the State in which the company was resident). This provision applies where the alienator’s ownership or stake (including related parties shares) amounts to a minimum of 25 per cent of the total share capital of the aforementioned company at any time during the basis period for the year of assessment or the taxable year; and said alienation constitutes a minimum of 5 per cent of the total share capital of the country.
Gains resulting from the alienation of any property or assets not explicitly covered under this provision are to be taxed in the state in which the alienator resides.
In Japan, capital gains are to be treated as ordinary income as taxed appropriately for corporate income tax purposes. Singapore does not impose a tax on capital gains.
Where a business is resident in a Contracting State, any profits it derives are to be taxed only in the State in which it is resident. An exception to this is where the business carries on business in the other Contracting State through the operation of a Permanent Establishment. However, it is only the portion of the business’ profit that can be effectively attributed to the PE that is eligible for taxation in the other Contracting State.
When determining the profits of the Permanent Establishment, it is to be allowed all expenses that can be reasonably attributed to the PE, and all deductions that would be deductible were the PE an independent enterprise. Profits of the PE are to be determined as if it were a separate and distinct enterprise from the controlling company that is engaged in similar or the same activities under similar or the same conditions, and dealing wholly independently with the enterprise of which it is a PE.
The mere purchase of goods or merchandise for the enterprise for which it is a PE shall not render profits attributable to the PE. Profit attribution to the PE is to be made by the same method every year, unless there exists a valid reason to alter the method.
Where the competent authority lacks adequate information, the provisions of the double taxation agreement are not to impede the discretion of the competent authority or the respective laws of the Contracting State.
Definition and treatment of associated enterprises
Where an enterprise or persons involved in an enterprise resident in a Contracting State participate either indirectly or directly in the management, control or capital of an enterprise resident in the other Contracting State, the enterprises are referred to as ‘associated enterprises’.
The profitability and income of the enterprises will be affected by differences between the terms and conditions of operations and transaction between the associated enterprises and those that would be made between independent enterprises.
The DTA provides that Contracting States may deem a taxable income that would have otherwise accrued were the associated enterprises independent. The enterprises may then be taxed according to this new taxable income amount.
Should a situation arise where a Contracting State a taxes a resident enterprise on profits, and these same profits have already been taxed by the other Contracting State, and it is the ruling of the first-mentioned State that such profits would have accrued to the enterprise were the enterprises independent, it is to make appropriate adjustment to the amount of tax levied on those profits, provided that the competent authority of the other state considers the adjustment to be justified. The respective competent authorities of the Contracting States shall consult each other if need be.
Income derived from Air & Shipping Transport
Where a resident of a Contracting State derives profits from the operation of aircraft and ships in international traffic, the State shall have sole right of taxation.
The provision applies to the share of the income derived by an enterprise of a contracting state through the operation of aircraft or ships through the enterprises participation in a joint business, pool or an international operating agency.
Income derived from Property
Income derived from immovable property situated in a Contracting State – including immovable property used for the performance of independent personal services and immovable property of an enterprise – by a resident of the other Contracting State are to be taxed in the first-mentioned Contracting State (the State in which the immovable property is located).
This agreement covers income derived from the direct use, letting of, or any use in any other form of the immovable property. The specific properties comprising ‘immovable property’ is to be defined by the law of the Contracting State in which the property is located. It is considered to include equipment, accessories, livestock, rights and usufruct of the immovable property, as well as any rights to fixed or variable payments as consideration for the right to work or working of mineral deposits and other sources of natural resources. Aircraft and ships are not considered immovable property under the provision.
Wages and salaries
Remuneration including salaries and wages derived by a resident of a state as consideration for their employment are only to be taxed by the Contracting State in which they reside, unless in situations where the resident exercises their employment in the other Contracting State. Even where the employment is exercised in the other Contracting State, the income is only the be taxed in the State in which the resident resides under the following circumstances:
- the recipient was present in the Contracting State in which they are not a resident for tax purposes for a period or periods spanning fewer than 183 days in the aggregate in the relevant calendar year; and
- the recipient’s remuneration was paid on behalf or paid by an employer resident in the same Contracting State in which the recipient is resident; and
- the recipient’s remuneration was not borne by a Permanent Establishment held by the employer in the other Contracting State.
The Contracting State of whom an enterprise is resident whose board of directors a resident of the other Contracting State serves shall have the right of taxation for any director’s derived by the resident.
Where a resident of a Contracting State derives income through the exercising of personal activities in the other Contracting State as a musician or theatre, radio, motion picture or television artiste or other similar entertainer, or as a sports person, the other Contracting State will have right of taxation. However, such incomes are to be exempt from taxation where they are accrued for such activities exercised in one of the Contracting States through the activities of some mutually agreed exchange programme, or are substantially supported by public funds provided by the Government of the other Contracting State, or a local authority, political subdivision, or a statutory body of the other State.
Should a resident of a Contracting State derive a pension or annuity from the other Contracting State, that income shall only be taxable in the first-mentioned State.
Where a resident of a Contracting State is the recipient of a pension, annuity or other similar remuneration that arose in the other Contracting State and is paid by or from funds created by the other Contracting State or a political subdivision, statutory body or a local authority of the same, that income may only be taxed in the State who held the funds from which the payment was made or in which the payment arose.
Professors, researchers and teachers
Where a resident of a Contracting State visits the other Contracting State for a period not exceeding two years on invitation for the sole purpose of teaching or researching at any educational institution that exists primarily for research purposes such as a school, university or college, that resident shall be exempt from taxation in the other Contracting State on any remuneration paid for their teaching or research. Should the teaching or research be solely for the benefit of a private interest the provision of the double taxation agreement is not to apply.
Trainees and students resident in one Contracting State who are temporarily present in the other Contracting State for the purposes of studying a as a business apprentice, as a student at a recognised university or other similar institution or as a recipient of an allowance, grant or award from a religious, government or charitable organisation are to be exempt from taxation in the other Contracting State.
The trainee or student is to be exempt from taxation in the other State on all grants and remittances received from abroad, and on any remuneration not exceeding 360,000 yen or its Sinaporean dollar equivalent paid in the Year of Assessment or taxable year as recognition for the provision of services in that other State, provided the services performed were in connection with the study, research or training of the student or were necessary for the maintenance of the student.
Similarly, any resident of a Contracting State who visits the other Contracting State for a period not exceeding 12 months where they are operating under a contract with an enterprise or educational, literary, educational, religious or charitable organisation to acquire technical, business or professional experience other than the aforementioned organisation is to be exempt from taxation on remunerations derived in the other State. All remuneration not exceeding 1,420,000 Yen or it’s Singaporean dollar equivalent in a Year of Assessment or taxable year is to be exempt from taxation.
Similarly, any resident of a Contracting State visiting the other Contracting State through an arrangement with the government of the other Contracting State is to be exempt from taxation in the other State on any remuneration not exceeding 1,420,000 Yen or its Singaporean dollar equivalent received for the purpose of research, training or study in the relevant Year of Assessment or taxable year.
Provisions for the elimination of double taxation
Where income is subject to taxation in both Contracting States, the double taxation agreement provides relief from double taxation.
For Japanese residents, Singapore tax payable on income derived from Singapore is to be allowed as a credit against any Japanese tax payable on the same income. Japanese tax payable on income derived from Japan is to be allowed as a credit against any Singapore tax payable in respect of the same income. The value of the provided credit is not to exceed the respective country’s pre-credit tax.
Should dividend income be paid to an enterprise or person resident in Japan from a Singapore company in which the enterprise or company holds a minimum 25 per cent voting rights, the competent authority of Japan is to the consider any Singapore tax payable by the Singapore-resdient company in respect of the income out of which the dividend was paid. The credit given is not to exceed the part of the pre-credit Japanese tax payable. Equally, where the recipient of the dividend income is a resident of Singapore, a credit equivalent to the Japanese tax payable by the company out of the income from which the dividend is paid is to be taken into account.
With investment in the ASEAN community and the broader Southeast Asian communities growing, Japanese investors and firms stand to benefit immensely through establishing regional bases in Singapore. Firms from both countries are seeking partnerships in order to maximise their return on the regional growth opportunity. Savvy real estate and infrastructure developers stand to benefit greatly from the Japanese Olympic boom, and Singapore companies hoping to invest in clean energy and environmental technology and processes can tap the ever evolving opportunities in Japan.
This double taxation agreement and the pre-existing free trade agreements between Singapore and Japan will further develop the economic cooperation between the countries and will continue to aid investors and companies targeting regional markets.
Please refer to the IRAS website for more details on the tax treaty between Japan and Singapore.
Refer to the Singapore Double Taxation Agreements (DTA) Guide for more general information on Singpaore’s DTAs.