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Croatia: Agreement on double taxation avoidance signed with Japan

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Croatia and Japan celebrated their 25th anniversary of diplomatic relations in 2018. This milestone was further marked with the signing of an agreement on double taxation avoidance (DTA) on October 19 2018. The official document was 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 exports to Japan increased by 55% in 2017, whereas the overall exchange of goods reached $86 million. 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 DTA will surely help to remove barriers and achieve such a goal.

The agreement generally follows the standard structure and principles of the OECD's Model Tax Convention, and applies to profit, income and surtax on income tax in Croatia, and income, corporate, special income tax for reconstruction, local corporation tax, and local inhabitant taxes in Japan.

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. It also includes taxes on capital appreciation. The maximum withholding tax rates between the two countries are agreed as follows:

  • 5% on dividends (however, it is exempt if the company which directly or indirectly owns at least 25% of the voting power of the company paying the dividends throughout a 365-day period);

  • 5% on interest (however, it is exempt if the beneficial owner of the interest is a governmental body, local authority, central bank or similar); and

  • 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, overall removing a significant portion of misinterpretation or misuse of the information contained therein.

Taxation not in accordance with the provisions of the agreement shall be resolved by mutual agreement between the tax authorities of the two countries. Both countries have also committed to an efficient exchange of information aimed at the prevention of international tax evasion and tax avoidance, in addition to mutually lending assistance in the collection of tax claims.

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