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HMRC internal manual

Double Taxation Relief Manual

Double Taxation Relief Manual: Guidance by country: Japan: Notes

Limitation on benefits

Under Article 1, the treaty applies to persons who are resident in the United Kingdom.

But those residents can only obtain certain of the benefits provided by the treaty if, under Article 22:

  • They meet the definition of a qualified person (see paragraph 2);
  • They are entitled to derivative benefits (see paragraph 3);
  • The income from Japan is derived in connection with, or is incidental to, a business carried on in the UK (see paragraph 4); or
  • Or the competent authority of Japan otherwise determines that benefits should be granted (see paragraph 6).

The benefits that are contingent on qualification under Article 22 are those provided by:

  • Paragraph 3 of Article 10 (exemption for dividends);
  • Paragraph 1 of Article 11 (exemption for interest);
  • Article 12 (Royalties);
  • Article 13 (Capital gains); and
  • Article 21 (Other income)

Changes made by the 2013 protocol

The protocol that entered into force in 2014 updated the treaty that has been in effect since 2007. Apart from a general updating to reflect changes in the OECD Model Tax Convention and the domestic laws and treaty preferences of both state, notable changes include:


Dividends paid to parent companies holding between 10 and 50 per cent of the subsidiary paying the dividend are now free of withholding tax (previously 5 per cent).  The withholding rate for portfolio investors of 10 per cent is unchanged – including for property income dividends paid by UK entities.


Previously, interest was subject to a 10 per cent withholding tax, with an exemption for certain categories of recipient, including pension funds and certain financial institutions.  Under the new treatment, all interest is now free of withholding tax with the exception of payments that are formally interest, but are calculated by reference to profits etc., which are subject to a 10 per cent rate.

Business profits

The new OECD business profits article replaces the old one. Unlike the rest of the protocol, it applies in the UK from 6 April 2016 for profits charged to income tax and capital gains tax and from 1 April 2016 for profits charged to corporation tax. In Japan it applies with respect to profits for any taxable year beginning on or after 1 April 2016.

Capital gains

A provision that allowed Japan to tax UK companies on gains from the disposal of shares in Japanese companies in certain circumstances was removed by the protocol. In its place is a more limited provision applying only to distressed Japanese banks.

Limitation on benefits

The protocol narrowed the scope of application of the limitation on benefits article (Article 22) so that it no longer applies to benefits otherwise due under the business profits article (Article 7).


The mutual agreement procedure article (Article 25) now provides for mandatory binding arbitration.