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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This article covers the following topics:

Japan-Singapore Relations
Overview of Japan-Singapore Double Tax Treaty
Scope of the Treaty
How is Tax Residency Defined Under the Treaty?
Key Provision of the Treaty
DTAA at a Glance

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

The main goal of any DTAA is to reduce the tax burden on individuals and companies by eliminating the possibility of being taxed twice on the same income. The basic instrument established by the DTAA for this purpose is the foreign tax credit. It allows for a tax credit in the country of residence if the income was taxed in the source country.

Under the DTAA provisions, dividends, royalties, and interest are taxed in the country of a recipient's residency (income tax) and in the state of residency of the enterprise that is paying the dividends (withholding tax). To avoid double taxation, residents of the contracting states may use a tax credit scheme. In addition, the DTAA provides for reduced withholding taxes on dividends, interest, and royalties.

The credit is the lower of the tax paid or tax payable. For example, if the Singapore tax payable amounts to S$30,000 and the Japanese tax paid is S$40,000, the maximum double tax relief credit that can be claimed is S$30,000. If the Japanese tax paid is S$20,000, the maximum double tax relief credit granted would be S$20,000. In such a case, the Singapore tax resident remains liable for the balance of S$10,000 Singapore tax payable.

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.

Tax residency of corporate entities is determined by the country where the entity has its place of “effective management”, i.e., the place where the board of directors meets.

If none of the criteria mentioned above is able to determine residency, tax authorities in the two countries will reach a mutual agreement as to how fiscal residency for a specific individual or company is to be established. However, such situations are rare.

In the case of individuals, persons are deemed to be tax residents of the country of which they are citizens. If this is not applicable, they will be considered tax residents of the country in which they carry out most of their activities, where they live, or have a resident permit.

It is possible for individuals to be citizens of both states, and in that case, their fiscal residency will be considered the country where they have the closest ties. The individual will pay income taxes to that country and utilize the benefit from the provisions of the double tax treaty in that country.

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.

If the company carries on business activities in the other state through a PE, the profits of the company may be taxed in that other state, but only the portion that is attributable to that PE. The PE should be considered a separate enterprise for this purpose.

Permanent Establishment means a fixed place of business abroad, where the business of the company is wholly or partly carried on. A PE can be based on one or more of the following criteria:

A place of management
A branch
An office
A factory
A workshop, or
A mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.
A building site, a construction or installation project, or supervisory activities related to such project or site, are considered as a PE only if such site, project, or activities last more than six months.

Two enterprises are considered to be Associated Enterprises where:

An enterprise residing in state A participates directly or indirectly in the management, control, or capital of an enterprise residing in state B, or
The same persons participate directly or indirectly in the management, control, or capital of enterprises of state A and state B, and
The commercial relations of such enterprises are different from the relations of independent ones. In other words, the companies do not transact business at arm’s length.

In such a case, any profits which would, but by reason of the above conditions, have not accrued to one of the enterprises, may be included in the profits of that enterprise and taxed accordingly.

Dividends are traditionally taxed in the country of a recipient's residency. However, they may be also taxed in the country of residency of the company that is paying the dividends.

Singapore does not impose a withholding tax on dividends. In Japan, regular withholding tax is 20.42%.

If the DTAA applies, for the recipient that owns at least 15% of shares of the paying company the tax will be 5%. In all other cases tax on dividends will be 15%.

As a general rule, gains from selling any property are taxable only in the state where the seller is a resident.

However, there are certain exemptions:

Gains received by a person residing in state A from selling immovable property situated in state B are also taxed in state B.
Gains from selling of movable property forming part of the business property of a PE in state A of a company residing in state B, including gains from selling of such a PE, are also taxed in state A.
Gains received by a resident of state A from the selling of ships or aircraft operated in international traffic are taxable only in State A.
Gains received by a resident of state A from the selling of shares of a company residing in State B and not trading regularly at a stock exchange, and the property of which consists principally of immovable property situated in state B, are taxed in state B.
Gains received by a resident of a state A from selling shares of a company residing in state B are taxed in state B, if:
- Shares owned by the seller amount to at least 25% of the share capital of such company; and
- The shares sold amount to at least 5% of the entire share capital.

Note that currently Singapore does not tax capital gains, so such gains are taxable only in Japan.

The term "professional services" is used in the context of independent scientific, literary, artistic, educational, or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists, and accountants.

Income received by a resident of state A for professional services rendered in state B is taxable only in state A unless:

The person has an office in state B for the purpose of performing those activities, or
The person is present in state B for more than 183 days during the year.

If either of the above conditions is true, the income is also taxed in state B, but only so much of it as is attributable to that office or is earned in state B during the above-mentioned period.

In case of double taxation, the person may claim the tax credit in the state of residence.

Salaries, wages, and other similar payments received by a resident of state A from employment exercised in state B are taxed in state B.

However, payments received by a resident of state A for employment exercised in state B are taxable only in state A, if:

The recipient is present in state B for less than 183 days during the year, and
The payment is made by an employer who is not a resident of state B, and
The payment is not made by a PE which the hiring company has in state B.

In case of double taxation, the person may claim the tax credit in the state of residence.

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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