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Definition of agency PE revised — Orbitax Tax News & Alerts

On 30 April 2008, the parliament (Diet), passed a revision to the tax law on permanent establishments (PEs) to exclude "independent agents" from the scope of an agency PE. The revision was proposed in the tax reform prposal 2008. The revision enters into force with retroactive effect from 1 April 2008.

Prior to the revision, the scope of a PE under the domestic law included:

-   agents who were authorized to conclude agreements on behalf of the non-resident and who regularly exercise such authority;
-   agents who hold/store sufficient products of the non-resident to meet customer orders and also deliver such order to the customer on their request; and
-   agents, who on behalf of the non-resident, take orders from customers, negotiate or perform other essential tasks in concluding agreements and who perform this role regularly.

Under the OECD Model Convention (2005) and the Japan-United States tax treaty, the possibility of a PE arising from the use of agents was limited to persons who are authorized to conclude agreements in the name of the non-resident and who act on behalf of the non-resident in exercising such authority regularly. Additionally, the definition expressly excludes commission agents, wholesalers and independent agents.

The revision is necessary because:

-   the fact that "independent agents" were included in the definition of a PE resulted in a mismatch between the domestic law and tax treaties, as explained above; and
-   foreign fund investors use the services of foreign fund managers (instead of Japanese fund managers) to make their investments in Japan. Prior to the revision, under the domestic law, the use of local fund managers could result in the foreign investor being regarded as having an agency PE, and consequently subject to tax, in Japan unless a tax treaty excluded such managers from the definition of a PE. As a result, Japan's fund investment market was at a disadvantage vis-à-vis Hong Kong and Singapore.

The revision does not provide a clear definition for an "independent agent". The new law merely states that an independent agent "carries on business related activities independently of an offshore investor and in an ordinary manner".