The income tax treaty between Japan and Serbia entered into force on 5 December 2021. The treaty, signed 21 July 2020, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Japanese income tax, corporation tax, the special income tax for reconstruction, local corporation tax, and local inhabitant taxes. It covers Serbian corporate income tax and personal income tax.

Residence

If a person other than an individual is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, such person will not be entitled to any relief or exemption from tax provided by the treaty.

Withholding Tax Rates

• Dividends -
  • 5% if the beneficial owner is a company that directly holds, for a period of at least 365 days that includes the date on which entitlement to the dividends is determined, at least 25% of the paying company's voting power in the case of a paying company in Japan or capital in the case of a paying company in Serbia, unless the dividends are deductible; and
  • 10% in other cases, including where the dividends are deductible in computing the taxable income of the paying company
• Interest - 10% in general, although interest arising in a Contracting State shall be taxable only in the other Contracting State if:
  • the interest is beneficially owned by that other Contracting State, a political subdivision or local authority thereof, the central bank of that other Contracting State or any institution wholly owned by that other Contracting State or a political subdivision or local authority thereof; or
  • the interest is beneficially owned by a resident of that other Contracting State with respect to debt-claims guaranteed, insured or indirectly financed by that other Contracting State, a political subdivision or local authority thereof, the central bank of that other Contracting State or any institution wholly owned by that other Contracting State or a political subdivision or local authority thereof
• Royalties -
  • 5% of the gross amount of the royalties for the use of, or the right to use, any copyright of literary, artistic, or scientific work including cinematograph films; and
  • 10% of the gross amount of the royalties for the use of, or the right to use, any patent, trademark, design or model, plan, or secret formula or process, for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment in the other State; and
• Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable property situated in the other State, unless such shares or comparable interests are traded on a recognized stock exchange and the resident and persons related to that resident own in the aggregate 5% or less of the class of such shares or comparable interests.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Silent Partnership

Article 21 (Silent Partnership) provides that any income derived by a silent partner that is a resident of a Contracting State in respect of a silent partnership contract (Tokumei Kumiai in the case of Japan) or another similar contract may be taxed in the other State according to the laws of that other State, provided that such income arises in that other State and is deductible in computing the taxable income of the payer in that other State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Entitlement to Benefits

Article 28 (Entitlement to Benefits) includes the provision that the benefits of the treaty may be denied where an enterprise of a Contracting State derives income from the other State and:

• the first-mentioned State treats the income as attributable to a permanent establishment of that resident in a third jurisdiction;
• the profits attributable to the permanent establishment are exempt from tax in the first-mentioned State; and
• the tax paid on the income in the third jurisdiction is less than 60% of the tax that would have been paid in the first-mentioned State had the income not been attributable to the permanent establishment.

The above limitation will not apply, however, if the income derived from the other State emanates from, or is incidental to, the active conduct of a business carried on through the permanent establishment (other than the business of making, managing or simply holding investments for the enterprise's own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively). Further, benefits may still be granted to a resident of a Contracting State if, in response to a request by such resident, the competent authority of the other State determines that granting such benefits is justified.

Article 28 also includes a general anti-abuse provision, which provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.

MFN Clause

The final protocol signed with the treaty provides that if Serbia concludes an agreement with a third jurisdiction that provides more favorable treatment for the taxation of interest or royalties than provided under Article 11 (Interest) or 12 (Royalties), then the Contracting States shall, at the request of Japan, enter into negotiations with a view to incorporating such more favorable treatment into the Japan-Serbia tax treaty.

Effective Date

The treaty generally applies from 1 January 2022. However, Articles 26 (Exchange of Information) applies from the date the treaty enters into force without regard to the date on which the taxes are levied or the taxable year to which the taxes relate.