In this article we will discuss the double taxation agreements or double taxation treaties.
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Income taxation can be a problem for foreign employees and those who live in more than one country. In nations with global taxation, a non-resident citizen working abroad may be required to pay tax on their income both in their home country and in the country where it is earned.
Governments have recognized that this would be unjust and impede international commerce and entrepreneurship. As a result, they have each devised its own procedures to avoid taxing the same revenue twice.
In some situations, the amount of tax paid in one nation might be deducted from the amount owed in another. These agreements or contracts are called Double Tax Agreements (DTAs) and should be considered part of your expat tax preparation strategy.
Double tax agreements are complicated and frequently need expert advice, but they are designed to ensure that an individual may claim tax relief rather than paying tax in two different countries on the same income.
Each double tax agreement is unique, yet many follow similar principles, even if the specifics differ. For the purpose of this article, we will take as an example a tax resident in both the UK and another country.
Double Taxation Agreements in General
Double Taxation Agreements or DTAs are treaties signed by two or more nations to avoid international double taxation on income and property. The primary goal of the DTA is to divide the right to taxation among the contracting nations, eliminate discrepancies, provide equal rights and security for taxpayers, and to fight tax fraud.
Individuals having a permanent residency and full and unlimited tax liability in either of the contracting countries may be eligible for income and property tax exemptions/reductions under the rules of the respective agreements, if the income would otherwise be subject to double taxation. Each agreement is unique, so it’s important to read the fine print to figure out where the individual’s tax duty falls and which taxes the agreement covers.
DTA tax advantages for payments can be obtained in two ways. On the one hand, there may be a tax exemption or a lower tax rate on certain payments. On the other hand, withholding payments that have been deducted may be refunded
Double Taxation Agreements can really be a complex matter. Those who have dual residency must ensure that the appropriate amount of tax is paid, recovered, or offset in each nation. Some situations include more than two countries.
For example, a foreign person may be residing in the UK as an expat and earning an income from a third country; in this case, the foreign national must be conversant with DTA law to ensure that only the right amount of tax is paid in the relevant country.
Double Taxation Agreements with the United Kingdom
If you are a UK resident but live, work, or earn money in a nation other than the UK, you may need to become familiar with the Double Taxation Agreement (DTA).
Countries with Double Taxation Agreements with the UK
When it comes to double taxation agreements, each country has its own set of standards, therefore it’s critical to stick to the principles that apply to both parties. The nations with which the UK has double taxation agreements are listed below (as of 21st September 2021):
Albania, Algeria, Anguilla, Antigua and Barbuda, Argentina, Armenia, Aruba, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Belize, Bermuda, Bolivia, Bosnia-Herzegovina, Botswana, Brazil, British Virgin Islands, Brunei, Bulgaria, Cameroon, Canada, Cayman Islands, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Falkland Islands, Faroes, Fiji, Finland, France, Gambia, Georgia, Germany, Ghana, Gibraltar, Greece, Grenada, Guernsey, Guyana, Hong Kong, Hungary, Iceland , India, Indonesia, Iran, Ireland, Isle of Man, Israel, Italy, Ivory Coast, Jamaica, Japan, Jersey, Jordan, Kazakhstan, Kenya, Kiribati, Kosovo, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lesotho, Liberia, Libya, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malawi, Malaysia, Malta, Marshall Islands, Mauritius, Mexico, Moldova, Monaco, Mongolia, Montenegro, Montserrat, Morocco, Myanmar (Burma), Namibia, Netherlands, Netherlands Antilles (Curacao, Sint Maarten and BES Islands), New Zealand, Nigeria, Norway, Oman, Pakistan, Panama, Papua New Guinea, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saint Kitts and Nevis, Saudi Arabia, Senegal , Serbia, Sierra Leone, Singapore, Slovak Republic, Slovenia, Solomon Islands, South Africa, South Korea, Spain, Sri Lanka, St Lucia, Sudan, Swaziland, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Turks and Caicos Islands, Tuvalu, Uganda, Ukraine, United Arab Emirates, Uruguay, USA, USSR, Uzbekistan, Venezuela, Vietnam, Zaire, Zambia, Zimbabwe.
Active and historical double taxation agreements are listed on the UK Government’s website.
Application of Double Taxation Agreements and Treaty Residence
If an individual is tax resident in both the UK and another jurisdiction, i.e. a “dual resident,” and the other country has a tax treaty with the UK, the treaty shares the taxation rights over the individual’s income and profits between the two nations.
Identifying the individual’s “treaty residency” position is critical to deciding if a double tax treaty is conceivable and subsequently how to implement it, as it is the nation of treaty residence that normally assumes the taxing rights.
A number of “tie breaker” criteria defined in the applicable Double Tax Agreement in effect with the UK will be used to establish where you are treaty resident.
The following are two examples of treaty non-residence that are relevant:
1. An employer from the UK who is a dual resident but a treaty resident outside the UK
In this scenario, a person works for a UK employer yet is a dual resident who splits their time between the UK and abroad. Given that the individual works in two or more tax jurisdictions (including the UK), determining where they are treaty resident is critical.
In this case, the individual may be regarded a “treaty non-resident” in the UK, and the Employment Income Article of the Double Tax Agreement will normally limit the UK tax responsibility to just UK workdays. This implies that income tax would only be owing to the UK HMRC for days spent working in the UK, not for days spent working in other jurisdictions.
This is common in situations when an expat is working on a local UK contract, but their family has remained at home someplace in Europe, and they spend three to four days in the UK and the rest of their time at the family home outside of the UK.
2. A high net-worth investor who is a dual resident but a treaty resident outside the UK
If an individual is regarded as a treaty non-resident in the UK, the individual would only be liable for tax in the UK if the income came from UK activities, according to any double tax treaties in effect. This is significant because it protects all non-UK investment income and profits from UK taxation.
How to Claim “Treaty Residency” Under the Double Taxation Agreements
Despite their prevalence, the use of double taxation agreements, and hence the claim for tax relief, can be a laborious process.
To begin, a person who feels they may be tax resident in two jurisdictions, including the UK, must file a self-assessment tax return and a special tax treaty relief petition.
People can accomplish this on their own, but there are several laws, procedures, and tests that must be followed in order to apply the necessary tax residency statuses.
The use of an accountant who is skilled and experienced in seeking tax relief through double tax treaties is far more typical. Fees vary based on the intricacy of an individual’s unique circumstances; nevertheless, in almost all situations, the tax savings significantly outweigh the price of hiring an accountant, and they can rest certain that they are paying the correct amount of tax.
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