Japan Tax Bulletin
Change in Interpretation of Tax Convention by the National Tax Agency

November 2023
The National Tax Agency (NTA) in Japan announced on 30
March 2023 a change in interpretation of “the end of theaccounting period for which the distribution of profits takes place”
under (Article 10, Japan-Luxembourg Tax Convention (JLTC)),
following a case determined by the Tokyo High Court on 16
February 2023.

distribution of profits takes place” and it had owned the shares ofCompanies A and B for more than 6 months at that point. On theother hand, the NTA claimed that the day before the date of theNQBS is recognized as “the end of the accounting period forwhich the distribution of profits takes place” and Company X had
not owned the shares of Companies A and B for 6 months at thatdate.

1. Summary of the caseCompany X, a foreign company whose head office was in theGrand Duchy of Luxembourg, acquired 100% of the shares ofCompany A and Company B, which were both Japanese companies,
on 29 April 2014. Company A and Company B sold a part of theirbusinesses to other Japanese companies on 1 August 2014 by aNon-Qualified Business Split-off (NQBS), a type of organization
restructuring in Japan, where Company A and Company B sold apart of their businesses in exchange for interests in recipientcompanies and distributed them to Company X. Namely, Company
X received consideration which was partly recognized as dividends(“deemed dividends” in this context) by the NQBS. The amountof the deemed dividends was approximately JPY14 billion andCompany X paid withholding tax of 20.42%, around JPY2.8billion, under the Income Tax Act in Japan. Soon after Company X
found out that the applicable tax rate for the deemed dividends
could be reduced to 5% under Art. 10-2-a of JLTC, and Company
X claimed a tax refund of about JPY2.1 billion. However, since theNTA only gave around JPY700 million back to Company X,
assuming that the applicable tax rate could be reduced only to 15%
for the deemed dividends under Art. 10-2-b of JLTC, it resulted ina court case.
According to Art. 10-2-a of JLTC:
The applicable tax rate is 5%, in the case where a beneficiary owns
at least 25% of voting shares for 6 months before the end of theaccounting period for which the distribution of profits takes place.
According to Art. 10-2-b of JLTC:
The applicable tax rate is 15% for all cases other than the cases
described in Art. 10-2-a of JLTC.
2. Issue
The issue of this case is interpretation of “the end of theaccounting period for which the distribution of profits takes place”.
Company X claimed that the end of the fiscal year that included
the date of the distribution of deemed dividends should berecognized as “the end of the accounting period for which the3. Judgement
The Tokyo High Court judged that “the end of the accounting
period for which the distribution of profits takes place” under Art.
10-2-a of JLTC should be interpreted based on Art. 3-2 of JLTC,
which states that terms which are not defined in JLTC are regarded
to have the definition of the terms as defined in the country where
JLTC is applied. In addition, the court also judged that “the end of
the accounting period for which the distribution of profits takesplace” means an accounting period that included the date of thedistribution of deemed dividends as an ordinary meaning in termsof intents and purposes under Japanese law. In that context,
Company X owned the shares of Companies A and B for morethan 6 months. Therefore, the court has adopted Company X’s
claim and Tokyo High Court has made the same decision.
4. Announcement by the NTA
In response to the defeat in court, the NTA announced a change
in interpretation of “the end of the accounting period for which
the distribution of profits takes place” under JLTC on 30 March
2023. Previously, in the case of a deemed dividend on the basis ofan NQBS, the day before the NQBS was conducted was used asthe end of the accounting period for which the distribution ofprofits takes place under JLTC. However, in response to thejudgement, the NTA has changed its interpretation to treat the endof the fiscal year which includes the date of the NQBS as the endof the accounting period for which the distribution of profits takes
place under JLTC. Also, the same treatment has been applied todeemed dividends from the acquisition of treasury stock. Thischange by the NTA is applied retroactively. Therefore, if thewithholding tax is excessive as a result of a reassessment of theholding period requirements, a retroactive tax refund could beclaimed unless the withholding tax was paid more than 5 years ago.

5. Application of the case in practice
Similar provisions to this one are contained in tax conventions
with the following countries: Israel, Italy, Indonesia, Austria (untilpayments made before December 31, 2018), Canada, Singapore,Spain (until payments before December 31, 2021), Thailand, Korea,Denmark (until payments before December 31, 2018), Turkey,Norway, Bangladesh, Finland, Bulgaria, Malaysia, Luxembourg,
South Africa, and Mexico.

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