The income tax treaty between Uruguay and Japan will enter into force on 23 July 2021. The treaty, signed 13 September 2019, 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 Uruguayan tax on business income, personal income tax, non-residents income tax, and the tax for social security assistance.

Residence

If a company 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, the company will not be entitled to any relief or exemption from tax provided by the treaty.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel when the activities continue for a period or periods aggregating more than 183 days within any 12-month period.

Repatriated PE Profits

Article 7 (Business Profits) includes the provision that where an enterprise of a Contracting State has a permanent establishment in the other Contracting State, the profits attributable to the permanent establishment may be subject to a tax in that other Contracting State according to the laws of that other Contracting State when the profits are remitted to other parts of the enterprise out of that other Contracting State, but the tax so charged shall not exceed 5% of the amount of the profits so remitted.

Withholding Tax Rates

• Dividends – 5% if the beneficial owner has directly or indirectly owned at least 10% of the paying company's voting power in the case of Japan or capital in the case of Uruguay throughout a 183-day period that includes the date on which entitlement to the dividends is determined (not applicable if the dividends are deductible for the paying company); otherwise, 10%
• Interest - 10%, although an exemption applies where the interest arising in a Contracting State:
  • is beneficially owned by the other Contracting State or paid in respect to debt-claims guaranteed, insured, or indirectly financed by the other Contracting State; or
  • is beneficially owned by a financial institution resident in the other Contracting State and is paid by a financial institution or is paid in respect of debt-claims granted for a period of at least three years for the financing of investment projects
• Royalties - 10%

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;
• 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, with an exemption where the shares or comparable interests are traded on a recognized stock exchange and the alienator together with related parties own in the aggregate 5% or less of the shares or comparable interests; and
• Gains from the alienation of rights that directly or indirectly entitle the owner of such rights to the enjoyment of immovable property situated in the other State.

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

Silent Partnership

Article 20 (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.

Arbitration

Article 24 (Mutual Agreement Procedure) includes the provision that where the competent authorities are unable to resolve a MAP case within two years, any unresolved issues arising from the case may be submitted to arbitration if the person that presented the case so requests. Unresolved issues may not, however, be submitted to arbitration if a decision on the issues has already been rendered by a court or administrative tribunal of either Contracting State.

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 does not apply if the income derived from the other Contracting 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 if, in response to a request by such resident, such competent authority determines that granting such benefits is justified in light of the reasons such resident did not satisfy the requirements.

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.

Effective Date

The treaty generally applies from 1 January 2022, although Articles 25 (Exchange of Information) and 26 (Assistance in the Collection of Taxes) apply from the date of its entry into force without regard to the date on which the taxes are levied or the taxable year to which the taxes relate.