Japan-Singapore Double Tax Treaty

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 ataxes covered by it, specific rules on taxation of different types of income, regulations for eliminating double taxation, and other salient features of the treaty.

Introduction

J

apan 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, defence, 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 programme — the Japan-Singapore Partnership Programme 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 (DTA), a basic instrument for resolving this issue. If you are planning to set up a Singapore company that will conduct business with Japan, this article will be highly relevant to you.

 This article  includes the following topics:

What is the Japan-Singapore Double Tax Treaty?

The Singapore-Japan DTA 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 DTA was signed and became effective in 2010.

Scope of the Treaty

Personal scope

The DTA applies to residents of both contracting states, i.e. to legal entities and individuals who reside in Japan, or Singapore, or both countries.

Types of taxes covered

The DTA covers all taxes on income levied by the relevant tax authorities.

In the case of Japan, the treaty applies to "Japanese tax", namely:

  • Income tax;
  • Corporation tax;
  • Local inhabitant tax

For Singapore, the DTA applies to the "Singapore tax", namely:

  • Income tax

This Agreement also applies to any taxes that may be imposed in addition to or in place of the ones that currently exist.

Key Provisions of the DTA

Residency-based Taxation

Under the DTA, 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.

Individuals

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.

Corporate entities

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 mutual agreement as to how fiscal residency for a specific individual or company is to be established; however, such situations are rare.

Income From Immovable Property

Income received by a person residing in State A from immovable property (including income from agriculture or forestry) situated in State B is taxed in State B.

The term “immovable property” should be defined in accordance with the law of the state in which the property is situated.

Business Profits

The profits of an enterprise residing in State A are taxable only in State A, unless such a company carries on business in State B through a Permanent Establishment (PE).

Permanent Establishment

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.

Shipping and Air Transport

Profits from the operation of ships or aircraft in international traffic carried on by a company residing in State A are taxed only in State A.

Associated Enterprises

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, Royalties, Interest

The DTA says that dividends, royalties, or interest are taxed in the country of a recipient's residency (income tax) and in the country of residency of the company 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 DTA provides for reduced withholding taxes on dividends, interest, and royalties. The table below illustrates this:

Income

Regular withholding tax in Japan Regular withholding tax in Singapore Treaty tax rate
Dividends

20.42%

Singapore does not impose withholding tax
  • 5% if the recipient is a company that owns at least 15 percent of shares of the paying company; and
  • 15% percent in all other cases.
Royalties 20.42% 15% 10%
Interest 20.42% 10% 10%

Avoidance of double taxation

The main goal of any DTA 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 DTA 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.

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.

Capital gains

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 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 percent of the share capital of such company; and
    • The shares sold amount to at least 5 percent of the entire share capital.

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

Professional services

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 are 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 and wages

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.

Directors' Fees

Directors' fees and other similar payments received by a resident of State A for service as a member of the board of directors of a company which is a resident of State B are taxed in State B.

Artists and Athletes

Income received by an individual who is a resident of State A as an artist working in theatre, radio, or TV, or who is a musician or sports person, for personal activities exercised in State B is taxed in State B.

Pensions

Pensions and other similar remuneration paid to a resident of State A for past employment are taxable only in State A.

Payments for Governmental Functions

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

Students and Trainees

Payments that a student or a trainee who is resident of State A receives during the education period in State B are exempt from tax in both states, given that such payments are made from any country except for the State B.

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DTA — At A Glance

Types of Income/Payments Where is the income 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

Taxed in the state 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.
Professional services Taxed in the state where the person is a resident and in certain cases in the state where the work is performed.
Salaries and wages Taxed in the worker’s state of residency 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 Taxed in the state that pays the remuneration.
Payment to students and trainees Tax exempted.

If you need further clarifications on cross-border tax matters between Japan and Singapore, feel free to contact our tax consulting team.

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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. Like every other DTA Singapore has entered into, its agreement with Japan contains information on how tax residency is established, with the purpose of avoiding a levy of similar taxes on taxpayers with activities in both countries.

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

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