On August 25, 2010, the Japanese and Dutch Ministries of Finance announced that a new tax treaty had been signed by the authorized representatives of both countries. In a press release of the same date, the Dutch Minister of Finance noted that the parliamentary ratification process is likely to continue into 2011, which means that the new treaty will likely not enter into force before January 1, 2012.
One of the highlights of the new treaty is that it provides an exemption from dividend withholding tax for qualifying dividends distributed by a resident of one of the treaty countries to a resident of the other treaty country. The current treaty allows a 5% withholding tax on qualifying dividends.
The exemption may, in principle, be applied if a corporate resident of one of the treaty countries has held at least a 50% voting participation in the distributing company for a minimum period of six months. A 5% withholding tax limit applies for participations of 10% to 50%, and a 10% limit applies in other cases. Certain anti-avoidance provisions apply in this context.
No changes have been made to the interest withholding tax rate, which remains at 10%. However, certain qualifying financial institutions, including banks and insurance companies, will benefit from an exemption from interest withholding tax under the new treaty.
Under the new treaty, the royalty withholding tax limit will be reduced from 10% to nil.
The new treaty also contains a provision under which the qualifying shareholding ratio that needs to be held by a Japanese parent company in its Dutch subsidiary in order to qualify for the Japanese Foreign Dividend Exclusion regime, will be reduced from the domestic law percentage of 25% to only 10%.