What does No PE no tax mean?
This is the basic idea in international taxation that “there is no taxation unless there is a permanent establishment (PE).” This is the idea that when a country imposes tax on a foreign company, it only applies the tax if the foreign company has a permanent business base in that country. This means that if you do not have a permanent establishment, you will not be taxed.
However, it is important to note that this means that business income is not taxed. Other taxes may also be levied.
As stated in the main content of the OECD Model Tax Convention (quoted from the Ministry of Finance website) below, business profits are not subject to tax if the business does not have a permanent establishment in the country.
Main contents of the OECD Model Tax Convention
Stability of tax relations (ensuring legal stability) and elimination of double taxation
Determination of the scope that can be taxed in the source country (country where income is generated)
- Business profits are taxed only on profits earned from the activities of branches, etc. (permanent establishments) located in the source country.
- For investment income (dividends, interest, royalties), a maximum tax rate (including tax exemption) is set in the source country.
How to eliminate double taxation in your country of residence
- Foreign income exemption method or foreign tax credit method
Source: Ministry of Finance homepage: Quoted from the overview of tax treaties
Points to note
“No tax if there is not a PE” refers to business income, as mentioned above.
In other words, even foreign corporations that do not have a PE may be subject to consumption tax.
Additionally, PE is generally stipulated in tax treaties, and the scope may differ depending on the country. Therefore, it is necessary to check the tax treaty. For countries that have not concluded a tax treaty, it is necessary to check the domestic laws, etc. of that country.
Japanese consumption tax law provisions
consumption tax law
Article 4 Consumption tax shall be imposed on transfers, etc. of assets and specific purchases made by business operators in Japan in accordance with this Act.
- According to this law, consumption tax will be imposed on foreign goods collected from bonded areas.
Article 2-4 Business Operator means an individual business operator and a corporation.
The Consumption Tax Law stipulates that consumption tax will be levied on the transfer of assets, loans, and provision of services carried out by business operators in Japan. Furthermore, business operators are defined as sole proprietorships and corporations, and there is no particular distinction between foreign corporations and non-residents. Therefore, even if a foreign corporation does not have a PE, the provisions of the Consumption Tax Law apply and consumption tax may be levied.
Relationship with tax treaties
Tax treaties generally cover income tax, corporate tax, resident tax, etc., but consumption tax is not covered. In other words, Japan’s consumption tax law applies.
summary
- No tax if there is no PE means that business income is not taxed.
- The scope of PE needs to be confirmed in tax treaties, etc.
- Consumption tax may be levied even if there is no PE.
