As two major economies in Asia, China and Japan have maintained close economic and trade relations for a long time. To further promote bilateral economic cooperation, eliminate double taxation barriers, and prevent cross-border tax evasion, the governments of the two countries signed the “Agreement between the Government of the People’s Republic of China and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income” (hereinafter referred to as the “China-Japan Tax Treaty”) in Beijing on September 6, 1983. This agreement officially came into effect on June 26, 1984, and was revised in 2008 to adapt to new economic situations and developments in international tax rules.

The signing and implementation of the China-Japan Tax Treaty are of great significance to the economic development of both countries. It not only provides clear cross-border tax rules for taxpayers of both countries, reducing the tax costs of transnational investment and trade, but also builds a cooperation platform for tax authorities of both countries in tax collection and administration and information exchange. With the deepening of Sino-Japanese economic relations, this treaty plays an increasingly important role in promoting bilateral investment, technology transfer, and personnel exchanges, becoming an important legal basis for promoting Sino-Japanese economic cooperation.

China-Japan Tax Treaty

1.1 Definition and Purpose of the Treaty

The China-Japan Tax Treaty is a legally binding bilateral international treaty aimed at regulating cross-border tax relations between China and Japan. According to the provisions of the treaty, its main purposes include avoiding double taxation, preventing tax evasion and promoting economic cooperation.

In terms of avoiding double taxation, the treaty prevents the same income from being taxed simultaneously in both China and Japan by clearly defining the division of tax jurisdiction, thereby reducing the tax burden on taxpayers. For example, the treaty defines the concept of permanent establishment and clarifies the allocation of taxing rights on business profits between the two countries, avoiding the problem of repeated taxation of cross-border operating enterprises.

Regarding the prevention of tax evasion, the treaty provides a legal basis for information exchange and mutual assistance between the tax authorities of the two countries, helping to combat cross-border tax avoidance behaviors and safeguard their respective tax interests. Article 26 of the treaty details the scope and procedures for information exchange, providing guidance for cooperation between the tax departments of the two countries.

In promoting economic cooperation, the treaty provides legal guarantees and predictability for cross-border economic activities of enterprises and individuals of both countries by formulating unified tax rules, which is conducive to promoting the development of bilateral investment and trade. For example, the treaty makes restrictive provisions on the withholding tax rates for cross-border income such as dividends, interest, and royalties, reducing the tax costs of cross-border investment.

1.2 Scope of Application

The scope of application of the China-Japan Tax Treaty mainly involves two aspects: personal scope and tax scope. In terms of personal scope, according to Article 1 of the treaty, this treaty applies to persons who are residents of one or both of the Contracting States. “Persons” here include individuals, companies, and other entities. Article 4 of the treaty provides a detailed definition of “resident”, referring to any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of head office, place of effective management or any other criterion of a similar nature.

For individuals who are simultaneously residents of both China and Japan, the treaty also provides a series of “tie-breaker rules” to determine their residential status. These rules include criteria such as permanent home, center of vital interests, habitual abode, and nationality, which are applied in order of priority to resolve the issue of dual residency.

In terms of tax scope, Article 2 of the treaty clearly enumerates the applicable taxes. For China, the applicable taxes include individual income tax and enterprise income tax (including foreign enterprise and foreign national income tax). For Japan, the applicable taxes include income tax, corporation tax, resident tax, and enterprise tax.

In addition, the treaty also stipulates that any identical or substantially similar taxes that are imposed after the date of signature of the treaty in addition to, or in place of, the existing taxes in either Contracting State shall also be covered by this treaty. This provision ensures the long-term effectiveness and adaptability of the treaty, enabling it to adapt to changes in the tax systems of both countries.

1.3 Identification of Permanent Establishment

The concept of permanent establishment is a core content in international tax treaties, directly related to the tax treatment of cross-border business operations. Article 5 of the China-Japan Tax Treaty provides detailed provisions on the definition and identification criteria of permanent establishment. According to the treaty, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. This definition emphasizes two characteristics: “fixedness” and “business nature”.

The treaty lists several typical permanent establishments, including a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. These examples help taxpayers and tax authorities better understand and identify permanent establishments.

For some special situations, the treaty also makes specific provisions. For example, a building site, a construction, assembly or installation project, or supervisory activities in connection therewith, constitute a permanent establishment only if it lasts more than twelve months. In addition, the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise constitutes a permanent establishment only if such activities continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period.

The treaty also lists some situations that do not constitute a permanent establishment, such as the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise, the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise, etc. These provisions provide tax convenience for enterprises to carry out preparatory or auxiliary activities in the other country.

1.4 Tax Jurisdiction over Different Types of Income

The China-Japan Tax Treaty stipulates corresponding principles for the allocation of taxing rights for different types of income to ensure that the tax interests of both countries in cross-border economic activities are reasonably distributed. These provisions cover various common types of international income, providing clear guidance for taxpayers and tax authorities.

For business profits, Article 7 of the treaty stipulates that the profits of an enterprise shall be taxable only in the State of which the enterprise is a resident, unless the enterprise carries on business in the other State through a permanent establishment situated therein. This provision reflects the “permanent establishment principle” in international taxation, that is, a country has the right to tax the profits of an enterprise only if the enterprise constitutes a permanent establishment in that country.

Regarding income from immovable property, Article 6 of the treaty clearly stipulates that income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State. This provision follows the “source principle of taxation” in international tax practice, fully respecting the tax jurisdiction of the country where the immovable property is located.

For investment income such as dividends, interest, and royalties, the treaty makes provisions in Articles 10, 11, and 12 respectively. These articles adopt a “mixed jurisdiction” model, allowing the source country to levy withholding tax within certain limits while retaining the taxing rights of the country of residence. For example, for dividends, if the beneficial owner is a company which owns directly at least 25 percent of the capital of the company paying the dividends, the tax charged by the source country shall not exceed 5 percent of the gross amount of the dividends; in all other cases, the rate shall not exceed 10 percent.

The allocation of taxing rights for income from independent personal services and income from employment is also different. According to Articles 14 and 15 of the treaty, income from independent personal services is in principle taxed by the country of residence, but if there is a fixed base in the source country or the stay exceeds 183 days, the source country also has the right to tax. As for income from employment, if the employee stays in the source country for no more than 183 days, and the remuneration is not borne by a resident employer or a permanent establishment in the source country, it is only taxed by the country of residence.

1.5 Japan’s Tax Incentive Strategies

Japan has formulated a series of tax incentive strategies to attract foreign investment and promote economic development. These strategies complement the China-Japan Tax Treaty, providing a favorable tax environment for Chinese enterprises and individuals investing and operating in Japan.

Firstly, Japan has implemented a policy of gradually reducing corporate income tax rates. From April 1, 2018, Japan’s corporate tax (national tax) rate was reduced to 23.2%, and with local taxes added, the actual comprehensive corporate income tax rate is about 29.74%. This tax rate level makes Japan more attractive in international tax competition.

Secondly, Japan has introduced specific tax incentives for certain industries and regions. For example, for foreign companies investing in national strategic special zones, Japan provides corporate tax reductions and accelerated depreciation of equipment investments. In addition, Japan has also established a “Comprehensive Special Zone System”, providing tax incentives for companies investing in specific fields (such as green innovation, life sciences, etc.).

Japan has also simplified the procedures for foreign companies to establish subsidiaries in Japan and relaxed visa requirements for foreign professionals by revising relevant regulations. Although these measures do not directly involve taxation, they, together with tax policies, constitute Japan’s comprehensive preferential system for attracting foreign investment.

1.6 Non-discrimination Principle

The non-discrimination principle is an important content in the China-Japan Tax Treaty, aimed at ensuring that nationals of one Contracting State are not subject to discriminatory tax treatment in the other Contracting State. This principle is reflected in Article 24 of the treaty and covers multiple aspects.

Firstly, the treaty stipulates that nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. This provision ensures that nationals of both countries enjoy equal tax treatment in the other country.

Secondly, stateless persons who are residents of a Contracting State shall not be subjected in either Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of the State concerned in the same circumstances are or may be subjected. This clause reflects the treaty’s protection of stateless persons.

The treaty also stipulates that the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favorably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision ensures that permanent establishments of foreign enterprises are treated fairly in taxation compared to local enterprises.

In addition, the treaty clearly states that interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. This provision ensures fairness in the tax treatment of cross-border payments.

1.7 Procedures for Enjoying Tax Treaty Benefits in Japan

To enjoy the preferential treatment stipulated in the China-Japan Tax Treaty in Japan, taxpayers need to fulfill certain application procedures. These procedures are designed to ensure the correct application of the treaty while also providing necessary regulatory basis for Japanese tax authorities.

Firstly, taxpayers need to submit a “Tax Treaty Related Report Form” to the Japanese tax authorities. This report form needs to be submitted when enjoying treaty benefits for the first time, or when relevant circumstances change. The report form requires filling in the taxpayer’s basic information, income type, applicable treaty articles, etc.

For specific types of income, such as dividends, interest, and royalties, taxpayers also need to submit a “Tax Treaty Related Withholding Tax Reduction/Exemption Application Form”. This application form needs to be submitted to the payer before the payment occurs, so that the payer can directly apply the preferential tax rate stipulated in the treaty when withholding at source.

In addition, taxpayers also need to provide a certificate of residency issued by Chinese tax authorities. This certificate is used to prove the taxpayer’s Chinese tax resident status and is an important prerequisite for enjoying treaty benefits. The certificate of residency usually needs to be updated annually.

It is worth noting that Japanese tax authorities have the right to conduct post-event reviews of the treaty benefits enjoyed by taxpayers. Therefore, taxpayers should properly keep relevant supporting documents for tax authorities’ inspection. If improper enjoyment of treaty benefits is found, taxpayers may face risks of additional tax payment, late payment fees, or even penalties.

Mutual Agreement Procedure

2.1 Overview of the Mutual Agreement Procedure

The Mutual Agreement Procedure (MAP) is an important mechanism in international tax treaties, aimed at resolving cross-border tax disputes and ensuring the correct implementation of tax treaties. In the China-Japan Tax Treaty, the MAP is stipulated in Article 25, providing an effective mechanism for taxpayers and tax authorities of both countries to resolve cross-border tax issues.

This procedure allows taxpayers to submit an application to the competent authority of their country of residence when they believe that the taxation measures taken by one or both contracting states are not in accordance with the provisions of the treaty. If the competent authority considers the taxpayer’s objection to be justified but is unable to arrive at a satisfactory solution, it should endeavor to resolve the case through mutual agreement with the competent authority of the other contracting state.

The establishment of the MAP reflects the spirit of international tax cooperation. It not only provides a remedy channel for taxpayers but also builds a communication platform for the tax authorities of both contracting states, helping to eliminate double taxation and promote the establishment of a fair and reasonable international tax order. The importance of this procedure lies in its provision of a flexible and efficient way to resolve cross-border tax disputes, allowing for direct dialogue between the tax authorities of both parties to solve problems without resorting to judicial procedures.

2.2 Legal Basis for the Mutual Agreement Procedure in Tax Treaties

The China-Japan Tax Treaty provides a clear legal basis for the MAP. Article 25 of the treaty details the conditions for initiating the MAP, time limits, implementation methods, and other contents, forming the legal foundation for this procedure.

Specifically, Paragraph 1 of Article 25 stipulates that when a taxpayer considers that the actions of one or both contracting states result or will result in taxation not in accordance with the provisions of this treaty, the person may present the case to the competent authority of the contracting state of which the person is a resident. The article also clearly states the time limit for presenting the case, which should be within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the treaty.

Paragraph 2 of Article 25 further stipulates that if the aforementioned competent authority considers the objection to be justified and is not itself able to arrive at a satisfactory solution, it shall endeavor to resolve the case by mutual agreement with the competent authority of the other contracting state, with a view to the avoidance of taxation which is not in accordance with the treaty.

Moreover, Paragraph 3 of Article 25 authorizes the competent authorities to communicate directly with each other to reach an agreement in order to resolve any difficulties or doubts arising as to the interpretation or application of the treaty. The competent authorities may also consult together for the elimination of double taxation in cases not provided for in the treaty.

These provisions provide a comprehensive legal basis for the MAP, ensuring its legality and operability.

2.3 Application of the Mutual Agreement Procedure

The scope of application for the MAP is extensive, covering various situations that may lead to taxation not in accordance with the provisions of the treaty. According to Article 25 of the China-Japan Tax Treaty, the MAP can be applied in the following situations:

Firstly, when a taxpayer believes that the taxation actions of one or both contracting states have resulted or will result in taxation not in accordance with the provisions of the treaty, the MAP can be initiated. This includes, but is not limited to, issues such as double taxation and tax discrimination.

Secondly, for difficulties or doubts arising as to the interpretation or application of the treaty, the competent authorities of the contracting states can seek solutions through the MAP. This provides a mechanism for unified understanding and implementation of the treaty.

Thirdly, for issues of eliminating double taxation not provided for in the treaty, the competent authorities can also discuss and resolve them through the MAP. This provides flexibility in dealing with new or complex international tax issues.

It should be noted that initiating the MAP does not affect the taxpayer’s right to seek other legal remedies. Paragraph 1 of Article 25 clearly states that the right of the taxpayer to make an application is not affected by the domestic legal remedies. This means that taxpayers can simultaneously initiate the MAP and domestic administrative reconsideration or litigation procedures.

2.4 Subjects of Mutual Agreement

The MAP mainly involves three types of subjects: taxpayers, competent authorities of the contracting states, and tax authorities.

Taxpayers are the initiators of the MAP. According to Article 25 of the China-Japan Tax Treaty, when taxpayers believe that the taxation actions of the contracting states are not in accordance with the provisions of the treaty, they have the right to submit an application to the competent authority of their country of residence. This grants taxpayers the initiative in international tax disputes.

The competent authorities of the contracting states are the core subjects of the MAP. The treaty authorizes the competent authorities to communicate directly and consult with each other to resolve tax disputes. In China, the State Taxation Administration is the competent authority responsible for the MAP; in Japan, it is the National Tax Agency. The responsibilities of the competent authorities include receiving applications from taxpayers, evaluating cases, and consulting with the competent authority of the other country.

Tax authorities, as implementing agencies, although not directly involved in mutual agreement, play an important role in initiating the procedure and executing the results. The taxation actions of tax authorities may trigger the MAP, and the results of mutual agreement also need to be specifically implemented by tax authorities.

It is worth noting that although taxpayers have the right to initiate the MAP, they are not direct participants in the consultation process. The consultation mainly takes place between the competent authorities of the two countries, reflecting the characteristic of resolving issues through inter-state consultation.

2.5 Legal Effect of Mutual Agreement

The results of the MAP have important legal effects on resolving international tax disputes. According to Article 25 of the China-Japan Tax Treaty, any agreement reached through mutual agreement by the competent authorities of both contracting states shall be implemented notwithstanding any time limits in the domestic laws of the contracting states.

This provision grants the results of mutual agreement an effect that transcends the time limitations of domestic laws, reflecting the principle that international treaties take precedence over domestic laws. This means that even if certain tax cases have exceeded the retroactive time limit according to domestic laws, as long as a solution is reached through the MAP, it can still be implemented.

However, it should be noted that the results of mutual agreement do not necessarily have a binding effect on taxpayers. If taxpayers are not satisfied with the results of the consultation, they can usually still seek other legal remedies. This reflects the flexibility of the MAP and the protection of taxpayers’ rights and interests.

In practice, the results of mutual agreement are usually recognized and implemented by taxpayers and tax authorities. This is because the MAP, as a consultation mechanism, often results in balanced solutions that take into account the interests of all parties.

2.6 Japanese Arbitration Clause

In the latest revised China-Japan Tax Treaty, both parties have introduced an arbitration clause, which is an important supplement to the MAP. The arbitration clause stipulates that if a case is not resolved through the MAP within a certain period (usually two years) after submission to the competent authority, the case can be submitted to arbitration at the request of the taxpayer.

The introduction of the arbitration clause aims to improve the efficiency and effectiveness of the MAP. It provides an “exit mechanism” for cases that have not been resolved for a long time, encouraging competent authorities to actively seek solutions within the specified time limit.

According to the arbitration clause, the arbitration panel consists of independent arbitrators who will make decisions on cases based on the provisions of the treaty and relevant facts. The arbitration decision is binding on both contracting states unless the person directly affected by the case does not accept the arbitration decision.

It should be noted that the arbitration procedure is not automatically initiated, but requires an explicit request from the taxpayer. In addition, if a decision on the case has already been made by a court or administrative tribunal of either party, it cannot be submitted for arbitration.

The introduction of the arbitration clause marks an important step forward for China and Japan in resolving international tax disputes, providing more guarantees for taxpayers and helping to improve the efficiency and fairness of tax treaty implementation.

Practical Application of China-Japan Tax Treaty

3.1 Case Analysis

The China-Japan Tax Treaty involves multiple aspects in its practical application. The following three typical cases are used to analyze the specific application of the treaty.

3.1.1 Case One: Permanent Establishment Determination

A Chinese company A established an office in Japan, mainly responsible for information collection and market research. The Japanese tax authorities considered that this office constituted a permanent establishment and should pay income tax on its income earned in Japan.

Analysis: According to Article 5 of the China-Japan Tax Treaty regarding permanent establishments, a fixed place of business used solely for preparatory or auxiliary activities does not constitute a permanent establishment. In this case, if the activities of the office are indeed limited to information collection and market research, which are preparatory or auxiliary in nature, it should not be determined as a permanent establishment. Chinese company A can initiate the mutual agreement procedure based on Article 25 of the treaty, requesting the Chinese tax authorities to consult with the Japanese tax authorities to correctly apply the treaty provisions.

3.1.2 Case Two: Withholding Tax on Royalties

Japanese enterprise B transfers a patented technology to Chinese enterprise C, agreeing that C will pay annual royalties. The Chinese tax authorities, according to domestic tax law, withhold income tax at a rate of 20% on the royalties paid to B.

Analysis: According to Paragraph 2 of Article 12 of the China-Japan Tax Treaty, the tax charged by the source country of the royalties (i.e., China) should not exceed 10% of the gross amount of the royalties. Therefore, the Chinese tax authorities should withhold income tax at the 10% rate stipulated in the treaty, rather than the 20% rate stipulated in domestic law. Japanese enterprise B can apply to the Chinese tax authorities for treaty benefits or initiate the mutual agreement procedure through the Japanese tax authorities to request the correct application of the treaty tax rate.

3.1.3 Case Three: Elimination of Double Taxation

A Chinese resident individual D works for a company in Japan and pays personal income tax in Japan. At the same time, as D still retains Chinese resident status, the Chinese tax authorities require D to pay personal income tax in China on global income.

Analysis: According to Article 23 of the China-Japan Tax Treaty on the elimination of double taxation, China should give credit for the tax paid by D in Japan. Specifically, China should allow a deduction from the tax on D’s income of an amount equal to the income tax paid in Japan, but such deduction shall not exceed the amount of the Chinese tax on that income computed in accordance with the taxation laws and regulations of China. D should provide relevant proof of tax payment in Japan to the Chinese tax authorities and apply for tax credit to avoid double taxation.

These cases demonstrate how the China-Japan Tax Treaty resolves issues such as permanent establishment determination, application of withholding tax rates, and elimination of double taxation in practical applications, reflecting the important role of the treaty in protecting taxpayers’ rights and promoting cross-border economic activities.

3.2 Common Issues and Solutions

In the practical application of the China-Japan Tax Treaty, some common issues are frequently encountered. The following are several typical issues and their solutions:

3.2.1 Tax Residence Status Determination

Issue Description: Due to differences in the criteria for determining tax residency between China and Japan, situations sometimes arise where the same person or enterprise is determined to be a tax resident of both countries simultaneously, leading to potential double taxation risks.

Solution: Article 4 of the China-Japan Tax Treaty provides clear provisions for determining the resident status of individuals and enterprises. For individuals, the treaty stipulates a series of criteria including permanent home, center of vital interests, habitual abode, and nationality to determine their resident status. For persons other than individuals, if they are residents of both parties, they shall be deemed to be a resident of the Contracting State in which their place of effective management is situated. In practice, taxpayers can apply to the tax authorities for confirmation of their resident status based on treaty provisions, and if necessary, initiate the mutual agreement procedure to resolve the issue.

3.2.2 Attribution of Profits to Permanent Establishments

Issue Description: When an enterprise constitutes a permanent establishment in another country, there is often controversy over how to correctly determine the profits attributable to that permanent establishment.

Solution: Article 7 of the China-Japan Tax Treaty provides provisions on the attribution of profits to permanent establishments. According to this article, the permanent establishment should be treated as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment, and its profits should be calculated accordingly. In practical operations, enterprises should prepare adequate contemporaneous documentation to prove that their profit attribution complies with the arm’s length principle. If disagreements arise with tax authorities, consideration can be given to initiating the mutual agreement procedure.

3.2.3 Procedures for Enjoying Treaty Benefits

Issue Description: Taxpayers often face problems such as complicated procedures and unclear requirements when applying for treaty benefits, affecting the timely application of treaty preferences.

Solution: The State Taxation Administration of China has issued the “Measures for the Administration of Non-resident Taxpayers’ Enjoyment of Treaty Benefits”, which clarifies the procedures and requirements for enjoying treaty benefits. According to these measures, taxpayers can enjoy treaty benefits through the method of “self-judgment, declaration of enjoyment, and retention of relevant materials for future reference”. Taxpayers should truthfully fill in the “Information Report Form for Non-resident Taxpayers’ Enjoyment of Treaty Benefits” and prepare relevant supporting documents for subsequent verification by tax authorities. For complex or controversial situations, it is recommended that taxpayers communicate with tax authorities in advance, and if necessary, apply for advance pricing arrangements or initiate the mutual agreement procedure.

3.2.4 Double Taxation Issues Caused by Transfer Pricing Adjustments

Issue Description: When the tax authorities of one country make transfer pricing adjustments to multinational enterprises, it may lead to double taxation in another country.

Solution: Article 9 of the China-Japan Tax Treaty stipulates the transfer pricing principles for transactions between associated enterprises, while Article 25 provides a mechanism for resolving such issues through the mutual agreement procedure. When facing transfer pricing adjustments, enterprises can request the competent authority of their country of residence to initiate a corresponding adjustment procedure to eliminate double taxation. In addition, enterprises can also consider applying for advance pricing arrangements to reach an agreement with tax authorities on transfer pricing methods in advance, reducing the risk of future disputes.

The above analysis shows that the China-Japan Tax Treaty provides a basic framework and principles for resolving cross-border tax issues. In practical application, taxpayers and tax authorities should thoroughly understand the treaty provisions, correctly apply relevant regulations, and fully utilize mechanisms such as mutual agreement procedures to resolve disputes, in order to achieve the treaty’s goals of promoting bilateral economic cooperation and avoiding double taxation.

Conclusion

4.1 Summary of the Main Features and Functions of the China-Japan Tax Treaty

As an important bilateral agreement between the two countries, the China-Japan Tax Treaty has the following main features and functions:

Firstly, the treaty establishes a clear mechanism for allocating taxing rights. By dividing taxing rights for different types of income, the treaty effectively avoids double taxation issues. For example, regarding business profits, the treaty stipulates that the source country has the right to tax profits attributable to a permanent establishment only if the enterprise constitutes a permanent establishment. This mechanism both protects taxpayers’ rights and clarifies the scope of taxation for each country.

Secondly, the treaty introduces the principle of non-discrimination. Article 24 of the treaty clearly states that nationals of one Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. This principle provides a fair tax environment for enterprises and individuals of both countries in their economic activities in the other country.

Thirdly, the treaty establishes a mutual agreement procedure. Through the provisions of Article 25, the treaty provides a flexible and efficient way to resolve cross-border tax disputes. This mechanism not only helps resolve specific cases but also promotes communication and cooperation between the tax authorities of the two countries.

Fourthly, the treaty promotes information exchange and administrative cooperation. Article 26 of the treaty stipulates the obligations and procedures for exchanging tax information between the tax authorities of the two countries, providing a legal basis for combating cross-border tax evasion.

Finally, the treaty effectively reduces the tax burden on cross-border investment and trade through measures such as lowering withholding tax rates and clarifying tax exemption situations, creating favorable conditions for economic cooperation between the two countries.

Overall, the China-Japan Tax Treaty has played an important role in eliminating double taxation, preventing tax discrimination, coordinating tax interests, and promoting economic and trade exchanges, becoming an important institutional guarantee for promoting the development of China-Japan economic relations.

4.2 Recommendations for Enterprises and Individuals

Based on the provisions and practical application of the China-Japan Tax Treaty, the following recommendations are made for enterprises and individuals:

Thoroughly understand the treaty content: Enterprises and individuals should fully understand the specific provisions of the China-Japan Tax Treaty, especially those related to their own business or income types. For example, enterprises should pay attention to clauses on permanent establishment determination and taxation of business profits, while individuals need to be aware of provisions on resident status determination and taxation of employment income.

Reasonably plan cross-border activities: The impact of the tax treaty should be fully considered before engaging in cross-border operations or investments. For instance, enterprises can arrange their operations in the other country reasonably based on permanent establishment regulations, and individuals can plan their work duration according to the provisions on residence time to optimize tax burdens.

Apply for treaty benefits promptly: When meeting the conditions for enjoying treaty benefits, applications should be made to relevant tax authorities promptly. For example, when receiving income subject to withholding tax, relevant certificates should be provided to the payer in a timely manner to apply the preferential tax rate stipulated in the treaty.

Maintain complete documentation: Both enterprises and individuals should properly maintain original documents related to cross-border income, such as contracts, invoices, payment vouchers, as well as declaration forms and supporting documents when enjoying treaty benefits. These materials may play a crucial role in future tax audits or dispute resolution.

Utilize the mutual agreement procedure: When encountering tax disputes, especially those involving double taxation issues, consideration should be given to initiating the mutual agreement procedure. Although this process may be time-consuming, it can usually effectively resolve cross-border tax disputes.

Consider advance pricing arrangements: For multinational enterprises with frequent related-party transactions, consideration can be given to applying for advance pricing arrangements to reach an agreement with tax authorities on transfer pricing methods in advance, reducing the risk of future disputes.

Stay informed about policy changes: Tax policies and practical approaches may change over time. Enterprises and individuals should continuously pay attention to the latest developments in tax policies of both countries and adjust their tax strategies in a timely manner.

4.3 Future Trends in China-Japan Tax Cooperation

Looking ahead, China-Japan tax cooperation is expected to show new development trends in the following aspects:

Deepening information exchange and administrative cooperation: With the continuous strengthening of global tax governance, China and Japan are likely to further deepen tax information exchange and administrative cooperation. It is expected that both parties will enhance the scope and frequency of automatic information exchange and conduct closer cooperation in combating cross-border tax evasion.

Improving dispute resolution mechanisms: As cross-border economic activities become more frequent, tax disputes may increase. In the future, the two countries may further improve the mutual agreement procedure, such as shortening processing times and increasing taxpayer participation. Meanwhile, the introduction and improvement of arbitration mechanisms may also become a direction for future development.

Addressing digital economy challenges: The rapid development of the digital economy has posed challenges to existing international tax rules. In the future, China and Japan may add special clauses for the digital economy in the treaty or supplement and improve existing rules through protocols or other forms.

Promoting green tax system cooperation: As both countries increasingly emphasize environmental protection, future tax treaties may include clauses promoting green development, such as special tax incentives for clean energy investments.

Strengthening anti-tax avoidance cooperation: With the advancement of the BEPS (Base Erosion and Profit Shifting) Action Plan, the two countries may add more anti-tax avoidance clauses to the treaty, such as principal purpose tests and limitation on benefits clauses, to prevent treaty abuse.

Expanding covered taxes: The current treaty mainly covers income tax. In the future, consideration may be given to including other taxes, such as value-added tax and consumption tax, in the treaty scope to more comprehensively coordinate tax interests between the two parties.

Promoting regional tax cooperation: Based on bilateral cooperation between China and Japan, the two countries may promote broader regional tax cooperation, such as engaging in multilateral tax coordination with other countries under the “Belt and Road” framework.

Strengthening capacity-building cooperation: The two countries may strengthen cooperation in tax administration capacity building, including personnel exchanges, experience sharing, and joint training, to enhance their ability to address international tax challenges.

In general, future China-Japan tax cooperation will develop towards a more in-depth, comprehensive, and innovative direction to adapt to the constantly changing international economic environment and tax situation, providing stronger institutional guarantees for economic cooperation between the two countries. Given the complexity of international tax issues, it is recommended to seek the help of professional tax advisors when dealing with major cross-border tax matters to ensure compliance and optimize tax arrangements.