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The newly revised Israel–Japan Double Taxation Convention:

The MLI's Impacts and Implications

Dr. Yehoshua Sherman, Adv.* Zeev Weiss, Adv.** Reika Saito, Adv.***

The year 2019 witnessed a revision of the previous 'Convention Between Japan and the State of Israel for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income'. This treaty has been amended in accordance with the mandates set forth by the OECD's ‘Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting’ (MLI) as a consequence of the fact that both Israel and Japan (as well as more than eighty additional States) are signatories to that agreement.

The revisions to this tax treaty have found expression in a number of contexts, each being potentially outcome determinative as to the profitability – and even the viability - of a commercial enterprise or transaction. Three of these revisions which will be noted here arise in the following provisions:

  1. The treaty’s previous tie-breaker provision to be applied in determining tax residence in cases in which dual residence has arisen regarding a corporation, has been replaced by a revised provision which provides far less clarity as to the determination of residence for treaty purposes. Dual residence will almost certainly expose a corporation to double taxation if not resolved. In light of the critical importance of this determination, corporations should examine the issue as to whether they now have exposure to double worldwide taxation, which, prior to the revision, did not exist.

  2. The test for determining the existence of a 'Permanent Establishment' maintained by an enterprise which is a tax resident in Japan or in Israel, in the second State has been significantly expanded. The result of such is that now the exposure to Japanese corporations conducting business in Israel (whether via employees arriving to Israel or via the use of Israel employees, representatives or agents) to being taxed in Israel is heightened. This amplified exposure to tax also exists for Israeli corporations conducting business in Japan under the above referred to circumstances. The impact is potentially higher taxation or even double taxation.

  3. The revised treaty now contains a broad anti-avoidance provision which empowers the Israeli Tax Authorities – without consulting the Japanese Tax Authorities - to deny treaty benefits to Japanese residents where it is claimed that the Japanese resident has made improper use of the treaty. That same authority to has been granted under the revised treaty to the Japanese Tax Authorities to deny treaty benefits to Israeli residents. Once again, the impact of this new provision is potentially higher taxation or even double taxation.

The OECD’s concerns as to the problem of tax-avoidance has led to the revisions noted above. While those concerns are legitimate and revisions of the tax treaties was appropriate, the solutions chosen by the OECD to treat these concerns are frequently the cause of uncertainty. Certainly, the scope of the revisions is of a magnitude such that those conducting economic activities between the Japan and Israel would be remiss should they not closely evaluate those revisions’ potential impact on the tax consequences of their activities. 

A detailed examination of the above issues, as well as additional issues, is presented in the attached analysis. In that analysis numerous examples as the application of these revisions is presented.


* Dr. Yehoshua Sherman, Adv., is the founder of the Dr. Yehoshua Sherman Law Office. He was formerly the Director of the  International Tax Department in the Legal Offices of the Israel Income Tax Commission. In that capacity he participated in the negotiation of more than twenty-five double taxation conventions, among them, the Israel-Japan Double Taxation Convention, as well as representing Israel in numerous Mutual Agreement Procedures. Dr. Sherman holds a doctorate in law from the University of London, in which he focused on issues in the field of international taxation.

** Zeev Weiss, Adv., heads Weiss, Porat & Co. Law Firm. He is the Chairman of the Israel-Japan Chamber of Commerce and Friendship Society. Zeev has over 25 years' experience in legally and commercially advising Japanese companies, investors and Government institutions on their dealings and investments in Israel, and Vice-Versa. He holds an MA of Tel Aviv University in East Asia Studies. 

*** Reika Saito, Adv., is a counsel in Ogasawara, Konno & Rokugawa, specializing in advising clients on a wide range of disputes, including those involving cross-border transactions. Reika has extensive knowledge of regulatory and commercial issues, and provides corporate clients with comprehensive legal advice. Reika lived in Israel for 3 years earned her LL.M. (Intellectual Property) from Tel Aviv University Law School.

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