Japan-Singapore DTAA: Double Tax Avoidance Agreement

This article provides an overview of the Japan-Singapore Double Tax Treaty. It can provide useful guidance to individuals or companies who are doing business in both — Japan and Singapore — as they explore their options for minimizing their tax burden. The article describes the scope of the agreement, types of taxes covered by it, specific rules on taxation of different types of income, regulations for eliminating double taxation, and other salient features of the treaty. If you are planning to set up a Singapore company that will conduct business with Japan, this article will be highly relevant to you.
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Japan-Singapore Relations

Japan and Singapore have a long history of bilateral cooperation. This history is marred by a period during the Second World War when Japan occupied Singapore. But after the war, both countries became part of the US-led Western Bloc and have collaborated extensively on the economic front.

In 2016 the two countries celebrated the 50th anniversary of the establishment of diplomatic relations. The bilateral relationship has deepened over the years. It now includes regular high-level exchanges and strong economic ties to facilitate cooperation in the areas of trade, counter‑proliferation, defense, environment, biomedical research, export control, and cyber-security. Amidst the COVID-19 pandemic, the collaboration has expanded to areas such as supply chain connectivity, vaccine multilateralism, and resumption of business travel.

A key milestone in the Singapore and Japan relationship was the Japan-Singapore Economic Partnership Agreement (JSEPA), concluded in 2002. As a result of JSEPA, Japan was Singapore’s 7th largest trading partner in 2019. At the end of 2018, Japan was Singapore’s 3rd largest investor, while Singapore was Japan’s top Asian and 4th largest foreign direct investor. Both countries also share many common interests on regional and international issues and collaborate closely under Singapore’s largest and most successful joint training program — the Japan-Singapore Partnership Program for the 21st Century (JSPP21).

The deep economic integration between Singapore and Japan created the need for tax regulation that would address the tax issues confronted by cross-border businesses conducted by residents of the two countries. In particular, the possibility that the same income could be taxed twice by the two countries prompted regulation to prevent this situation. This article will describe the Singapore-Japan Avoidance of Double Taxation Agreement (DTAA), a basic instrument for resolving this issue.

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What is the Japan-Singapore Double Tax Treaty?

The Singapore-Japan DTAA is an agreement establishing a single point of taxation for income earned in one country by a resident of the other country. Lacking such a treaty, both countries could levy their own taxes on the same income. The agreement establishes the taxation rights of each of the two treaty partners and ensures that any income normally taxable in both countries will be taxed in only one, or in both but at reduced rates.

The treaty was signed by Singapore and Japan in 1994 and entered into force in 1995. A Protocol amending certain provisions of the DTAA was signed and became effective in 2010.

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Scope of the Tax Treaty

How is Tax Residency Defined Under the Treaty?

Under the DTAA, individuals and companies are considered residents for taxation purposes of one of the two contracting states, and taxes are only charged by the country of residence, not by the country that is the source of income.

What Taxes Will I Owe Under the Japan-Singapore Double Tax Avoidance Agreement?

The tax you owe will depend on the country where you have to pay the tax which further depends on the type of income involved. Taxes on various types of income are described in the following sections.

In Which Country Will the Income be Taxed?

The DTAA specifically states where different types of income of a resident of either Singapore or Japan will be subject to tax. The following table states the type of income or payments made and the state where the income is taxed. This is important since the place of taxation will determine the rate of tax applicable to that type of income under the DTAA.

Type of income or payment

Where it is taxed

Income from immovable property

Taxed in the state where the property is situated.

Business profits

Taxed in the state where a company is managed and controlled — typically, the country of the company's board of directors meetings.

Permanent Establishment profits

Taxed in the state where it carries on business activities, but only in the amount attributable to that PE.

Profits from shipping and air transport

Profits from the operation of ships or aircraft used in international traffic are taxable only in the state where the enterprise that owns the vehicle is a resident (i.e. where a company is managed and controlled).

Dividends

May be taxed in the state where the recipient resides and in the state where dividends arise.

Interest

May be taxed in the state where the recipient resides and in the state where interest arises.

Royalties

May be taxed in the state where the recipient resides and in the state where royalties arise.

Capital gains

Taxed in the state where the seller is a resident.

Salaries and wages

Taxed in the worker’s state of residency and in certain cases in the state where the work is performed.

Professional services

Taxed in the state where the person is a resident and in certain cases in the state where the work is performed.

Directors’ fees

Taxed in the state where the company (paying the directors’ fees) resides.

Income of artists and sports persons

Taxed in the state where activities are performed.

Pensions

Taxed in the state where the recipient resides.

Government payments

Payments for governmental functions are taxable in the state paying such funds.

Payments to students and trainees

Tax exempted.

Protect Your Income From Excessive Taxation

To effectively grow your business and maximize profits, it’s essential to understand the tax benefits available to you and your business. If you’re considering incorporating your company in Singapore, CorporateServices.com can help you navigate the process by helping select the correct corporate structure that will minimize your taxes while fully complying with all government laws, regulations, and DTAAs.
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Conclusion

Japan is one of Singapore's strongest economic partners. A major milestone in relations between the two countries occurred in 2002 with the signing of the Japan-Singapore Economic Partnership Agreement. It enabled easier movement of people, goods, services, capital, information, etc. across borders between the states and strengthened cooperation in the trade sector by eliminating most tariffs on exports and imports. The deep cooperation led to the need to resolve tax issues occurring in the course of cross-border businesses, and the two states concluded a double tax treaty.

If you are an investor from Japan who needs information about how the DTAA can influence the manner in which your income is taxed, or if you would like to incorporate a Singapore company, please contact us and we will be glad to assist you.

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