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February 6, 2023

Japan and Switzerland’s updated Double Taxation Agreement has entered into force

  • The protocol amending the convention between Japan and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income (the protocol) entered into force on 30 November 2022.

  • The protocol, with the exception of the Mutual Agreement Procedure and binding arbitration provision (partially effective from 30 November 2022), is applicable as of 1 January 2023.

Executive Summary

The protocol amending the convention between Japan and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income (the protocol), signed on 16 July 2021, entered into force on 30 November 2022.

The protocol contains, among other provisions, eased source tax regulations for dividends and interest. It will also implement the Base Erosion and Profit Shifting (BEPS) minimal standard for Double Taxation Agreements (DTAs). Furthermore, the current Mutual Agreement Procedure (MAP) is slightly adjusted and supplemented by binding arbitration.

The protocol, with the exception of the MAP and binding arbitration provision (partially effective from 30 November 2022), is applicable as of 1 January 2023.

This Alert summarizes certain key amendments.

Detailed discussion

Taxation of business profits (Art. 7)

The provision regulating the taxation of business profits is amended in accordance with the current OECD Model Tax Convention (2017). Accordingly, business profits of an enterprise situated in one contracting state attributable to a permanent establishment of the other contracting state, may be taxed by the other contracting state by applying the arm’s-length principles for such internal dealings between the head office and branches. The provision also introduces the basis for primary and secondary adjustments by the two contracting states in the context of a permanent establishment.

Dividends (Art. 10)

In the case of a shareholding of at least 10% (Japan: voting power, Switzerland: capital or voting power) over a period of 365 days, dividend payments are fully exempted from taxation in the source state. A 10% source tax rate applies to any other cases.

Based on the old regulation, the exemption only applied in cases of a 50% shareholding over six months, whereas a 5% source tax rate applied in case of a 10% shareholding over six months. The general 10% source tax rate remains unchanged.

Interest (Art. 11)

Interest payments from one Contracting State to a person of the other Contracting State are now fully exempted.

Formerly, this full exemption only applied to e.g., government entities, financial institutions, recognized pension funds while a 10% source tax rate was applicable in all other cases.

As a result, both interest as well as royalty payments are now exempt from source taxation under the Japan-Switzerland DTA (the DTA).

Prevention of treaty abuse (Protocol Para. 1)

The protocol amends the language of the pre-existing Principal Purpose Test in accordance with Art. 29 para 9 of the OECD Model Tax Convention 2017.

The DTA contains another anti-abuse provision generally referred to as the limitation on benefits (LOB) clause in Art. 22A, to which no material amendments were made.

MAP and binding arbitration (Art. 25)

Where taxation in accordance with the provision of the DTA is unable to be resolved in a MAP between the two Competent authorities within three years, the protocol newly foresees binding arbitration by a panel composed of third parties. Furthermore, there have been minor adjustments to the MAP in Art. 25 para. 1 of the DTA.

Entry in to force and applicability

As noted, the protocol entered into force on 30 November 2022.

Art. 25 para. 1 of the DTA regarding the MAP is applicable from 30 November 2022, regardless of the date on which the taxes are levied or the year to which the taxes relate. The same is true for the arbitration procedure. However, unresolved issues in cases that are under consideration on 30 November 2022 cannot be submitted to binding arbitration earlier than three years after 30 November 2022.

All other amendments of the protocol are applicable as of 1 January 2023.

Some minor amendments of the protocol not discussed in detail here concern the following provisions: the preamble; taxes covered (Art. 2 DTA); general definitions (Art. 3); associates enterprises (Art. 9); income from employment (Art. 15); directors’ fees (Art. 16); students (Art. 21); methods for elimination of double taxation (Art. 23); and exchange of information (Art. 25A).


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), Japan Tax Desk

Ernst & Young LLP (United States), Switzerland Tax Desk

Ernst & Young Ltd, Zurich

Ernst & Young Ltd, Bern

Ernst & Young Ltd, Geneva


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