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Financial Services Tax News

December 2010

PwC Japan Tax Newsletter

The Tax Practice of PricewaterhouseCoopers Japan (Zeirishi-Hojin PricewaterhouseCoopers) is one of the largest professional tax corporations in Japan with about 560 people. Within this practice, our Financial Services Tax Group is comprised of approximately 100 professionals, dedicated specifically to advising the financial services industry. In addition to tax compliance services our tax professionals are experienced in providing tax consulting advice in all aspects of domestic/international taxation including financial and real estate, transfer pricing, M&A, group reorganization, global tax planning, and the consolidated tax system to clients in various industries. The firms of the PricewaterhouseCoopers global network ( provide industry-focused assurance, tax and advisory services to build public trust and enhance value for clients and their stakeholders. More than 161,000 people in 154 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. This Tax News is provided for general guidance only, and does not constitute the provision of advice or professional consulting of any kind. Before making any decision or taking any action, you should consult your usual PwC contact with all the pertinent facts relevant to your particular situation.

New Saudi Arabia/Japan Tax Treaty

On November 15, 2010, the Ministry of Finance (Zaimusho) announced that the Kingdom of Saudi Arabia ("Saudi Arabia") and Japan have signed the Convention between the Government of Japan and the Government of the Kingdom of Saudi Arabia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Saudi Arabia Treaty"). According to the Ministry of Finance's press release, the Saudi Arabia Treaty seeks to clarify the allocation of taxing rights between both countries in order to avoid instances of double taxation. It is also intended to further promote investment and economic exchange between Saudi Arabia and Japan. After Kuwait earlier this year, Saudi Arabia is the second Middle East country to recently conclude a tax treaty with Japan. Based on the Ministry of Finance's website, Japan is currently negotiating a tax treaty with the United Arab Emirates. This Newsletter outlines key provisions of the Saudi Arabia Treaty. Please note this is a general summary only and investors are advised to seek detailed advice when applying or interpreting the provisions of the Saudi Arabia Treaty to their particular circumstances. The full text of the Saudi Arabia Treaty is available electronically on the Ministry of Finance's website at: Link for Japanese version:

Zeirishi-Hojin PricewaterhouseCoopers Financial Services Kasumigaseki Bldg., 15F 2-5 Kasumigaseki 3-chome Chiyoda-ku, Tokyo 100-6015 Telephone: 81-3-5251-2400

© 2010 Zeirishi-Hojin PricewaterhouseCoopers. All rights reserved. "PricewaterhouseCoopers" refers to Zeirishi-Hojin PricewaterhouseCoopers or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

Financial Services Tax News December 2010


The protocol accompanying the Saudi Arabia Treaty specifies that pension funds and certain organizations (for example, religious, charitable or educational organizations) established under the laws of Saudi Arabia or Japan are included under the term "resident of a contracting state" for treaty purposes.

Withholding taxes

The Saudi Arabia Treaty reduces the withholding tax rates on dividends, income from debt-claims and royalties paid to residents of either state as follows: Dividends A withholding tax rate of 5% is imposed on dividends when the beneficial owner is a company that has owned, directly or indirectly, 10% or more of the voting shares (or of the total issued shares for a beneficial owner in Japan) of the company paying the dividends if a 183 day holding period requirement is satisfied. A maximum withholding tax rate of 10% will apply in all other circumstances. However, dividends paid by a company which is entitled to claim a deduction for dividends in calculating its taxable income in Japan, e.g., a tokutei mokuteki kaisha (a special purpose company often used in real estate investments in Japan) or corporate type investment trusts (e.g., J-REITs (Japanese real estate investment trusts)) are not eligible for the 5% reduced rate. Dividends from these entities derived by a beneficial owner resident in Saudi Arabia will instead be subject to a maximum withholding tax rate of 10%. Income from debt-claims Income from debt claims received by certain government-owned entities or central banks or sovereign wealth funds (including the Saudi Arabia Monetary Agency (SAMA), the Saudi Fund for Development, the Public Investment Fund, the Public Pension Agency, and the General Organization for Social Insurance in the case of Saudi Arabian entities and the Bank of Japan, the Japan Finance Corporation, the Japan International Cooperation Agency, and the Nippon Export and Investment Insurance in the case of Japanese entities) is exempt from withholding tax in the source country. The protocol further clarifies that income from debt-claims arising in Saudi Arabia and beneficially owned by a pension fund established under the laws of Japan shall only be taxable in Japan. For other circumstances, withholding tax is capped at 10%. Royalties The withholding tax rate for royalties is generally capped at 10%, with a 5% rate applying for royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment.

Capital gains

The Saudi Arabia Treaty provides a general exemption from taxation of capital gains albeit with some notable exceptions, described briefly below. Gains from the disposal of real property located in a contracting state (including shares of companies that derive 50% or more of their value directly or indirectly from real property in a contracting state) are not protected under the Saudi Arabia Treaty. The Saudi Arabia Treaty is silent on holding thresholds required to trigger taxation of gains realised from the sale of shares in a real estate holding company and as such the thresholds under Japanese domestic law would apply. Moreover, similar to Japanese domestic provisions capturing capital gains from the sale of substantial shareholdings in Japanese companies (commonly referred as the 25/5 Rule), gains derived by a resident of a contracting state from the sales of shares issued by a company being a resident in the other contracting state may be taxed in that other contracting state if the seller (together with special related persons) owned at least 25% of the total issued shares at any time during the taxable year of sale.



Financial Services Tax News December 2010

Under Japanese domestic law the 25% threshold is tested in the fiscal year of sale and prior two fiscal years, so the Saudi Arabia Treaty does provide certain protection. The Saudi Arabia Treaty is silent on the sale threshold required to trigger taxation, and as such the 5% threshold under Japanese domestic law would apply.

Tokumei kumiai profit distributions

The protocol to the Saudi Arabia Treaty specifically affirms that tokumei kumiai ("TK") profit distributions to non-resident TK investors without a permanent establishment are subject to tax under source country domestic law, i.e., a 20% domestic withholding tax rate in the case of Japan.

Other income

The Saudi Arabia Treaty contains an "other income" clause in line with the OECD Model Convention. However, an added paragraph provides that taxing rights are also allocated to the country of source, thus effectively overruling any exemptions for other income.

Anti-conduit provisions

The Saudi Arabia Treaty does not contain specific anti-conduit provisions, such as restrictions on benefits where back-to-back arrangements exist.

Limitation on benefits

Unlike more recent tax treaties concluded by Japan, the Saudi Arabia Treaty contains no comprehensive limitation on benefits ("LoB") tests restricting the benefits of the treaty to clearly defined and tested objective residents of Saudi Arabia and Japan. Such lack of a specific LoB provision is generally in line with other treaties which do not include a dividend, interest or royalty withholding tax exemption. However, a general LoB clause has been included that denies benefits where "the main purpose or one of the main purposes" of any person concerned with the creation or assignment of any shares, debt-claims or other rights or properties in respect of which income arises was to take advantage of the Saudi Arabia Treaty. There is no guidance in the Saudi Arabia Treaty, or within the attached Protocol, as to the interpretation of "main purpose".


The Saudi Arabia Treaty contains "Permanent Establishment", "Business Profits", and "Exchange of Information" clauses which generally conform to the OECD Model Convention.

Effective dates

The Saudi Arabia Treaty shall enter into force on the first day of the second month following the later diplomatic note confirming the formal constitutional processes required for entry into force (approval by the Diet in the case of Japan) have been completed. For Japanese tax purposes, the Saudi Arabia Treaty will apply: With respect to taxes withheld at source, for amounts taxable on or after 1 January in the calendar year next following that in which the Saudi Arabia Treaty enters in to force; With respect to taxes on income which are not withheld at source, as regards income for any taxable year beginning on or after 1 January in the calendar year next following that in which the Saudi Arabia Treaty enters into force; and With respect to other taxes, as regards taxes for any taxable year beginning on or after 1 January in the calendar year next following that in which the Saudi Arabia Treaty enters into force.



Financial Services Tax News December 2010

For more detailed information, please do not hesitate to contact your financial tax services representative or any of the following members:

Zeirishi-Hojin PricewaterhouseCoopers Financial Services Kasumigaseki Bldg. 15F 2-5 Kasumigaseki 3-chome Chiyoda-ku, Tokyo 100-6015 Telephone: 81-3-5251-2400 Partner Sachihiko Fujimoto Katsuyo Oishi Yuka Matsuda Tetsuo Iimura Akemi Kitou Hiroshi Takagi Yoko Kawasaki Raymond Kahn Stuart Porter Marc Lim Senior Manager Kenji Nakamura Nobuyuki Saiki Akiko Hakoda Kyoko Imamura Satoshi Matsunaga Soichi Toyama Daniel Lutz Manager Mami Sasaki Takashi Nonaka Hiroko Suzuki Nobuyoshi Hiruma Miyuki Kajiwara Naoko Makihira Seigo Sugiyama 81-3-5251-2423 81-3-5251-2565 81-3-5251-2556 81-3-5251-2834 81-3-5251-2461 81-3-5251-2788 81-3-5251-2450 81-3-5251-2909 81-3-5251-2944 81-3-5251-2867 81-3-5251-2589 81-3-5251-2570 81-3-5251-2486 81-3-5251-2855 81-3-5251-2586 81-3-5251-6212 81-3-5251-6640 81-3-5251-2471 81-3-5251-2417 81-3-5251-2156 81-3-5251-2871 81-3-5251-2520 81-3-5251-2223 81-3-5251-2539 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]




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Microsoft Word - FSNews_12_2010_E_.docx