2018 is a year in which Croatia and Japan celebrate the 25th anniversary of their diplomatic relations. This milestone is further marked with the signing of the agreement on avoidance of double taxation, which took place on October 19, 2018. The official document, Agreement between Japan and the Republic of Croatia for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and avoidance, has been concluded in English and is yet to be ratified and enforced by the respective states.
The relationship between Croatia and Japan shows signs of steady cooperation, mutual interest and friendship. With the recent signing of the Economic Partnership Agreement between the EU and Japan, the two countries are one step closer towards further strengthening their economic cooperation. Croatia’s export to Japan increased in 2017 by 55%, whereas the overall exchange of goods reached 85.8 million US dollars. Croatia mainly exports fish, high quality wood and food such as wine and truffles, while Japan exports to Croatia mostly machinery, appliances and cars. Both countries agreed that there is more room for improvement regarding Japan’s investment in Croatia and the economic exchange in general. The agreement on avoidance of double taxation will surely help to remove barriers and achieve such a goal.
The agreement generally follows the standard structure and principles of the OECD’s Articles of the Model Convention with Respect to Taxes on Income and on Capital, and applies to the below listed taxes:
- Profit Tax;
- Income Tax; and
- Surtax on the Income Tax
- Income Tax;
- Corporation Tax;
- Special Income Tax for Reconstruction;
- Local Corporation Tax; and
- Local Inhabitant Taxes.
The agreement specifies that taxes on income comprehend all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of any property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.
The maximum withholding tax rates between the two countries are agreed as follows:
- 5% on dividends (however, exempt if the company which owns directly or indirectly at least 25% of the voting power of the company paying the dividends throughout a 365-day period)
- 5% on interests (however, exempt if the beneficial owner of the interest is a governmental body, local authority, central bank and similar);
- 5% on income from royalties.
The Agreement defines in detail all relevant terms such as resident, permanent establishment, business profits, associated enterprises, silent partners, pensions, dividends, interest, royalties, capital gains, income from employment, income from immovable property, director’s fees, entertainers and sportspersons, students and so on, removing thus a significant portion of misinterpretation or misuse of the information contained therein. Taxation not in accordance with the provisions of this Agreement shall be resolved by mutual agreement between the tax authorities of the two countries. The countries also committed to an efficient exchange of information aimed at the prevention of international tax evasion and tax avoidance and to mutually lend assistance in the collection of tax claims.
Please contact our team of professionals in Croatia for additional information on the treaty and whether it will impact Croatian businesses trading with Japan and how you may benefit from the new agreement rates.
Silvia Cancedda, Client Relationship Advisor
David Jakovljevic, Tax and Legal Advisor
T: +385 1 7980 646
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