Double Taxation Treaties | A Guide For Expats
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IN THIS ARTICLE, YOU WILL LEARN THE FOLLOWING:
What double taxation is and how it works in practise
Understanding the various treaties
Key tax concepts for Expats to be aware of
How to claim tax relief
If you are living and working abroad, you may be at risk of double taxation, which occurs when you’re taxed on the same income in two or more countries - for example, in both the UK and your new country of residence.
Without proper planning, double taxation can become a financial challenge, with many individuals either paying tax twice or dealing with the inconvenience of claiming tax refunds.
Our guide will help you understand double taxation treaties and how to use them.
Double Taxation Treaties
A double taxation treaty (DTT) (also referred to as a double tax convention) is an agreement between two countries to ensure that individuals are not taxed twice on the same income. These agreements can provide clarity on which country has the right to tax specific types of income and offer expats protection from double taxation.
The UK currently has DTTs with over 130 countries, the full list can be found here. These treaties can help expats determine which country can tax their income, including pensions, dividends, capital gains and salaries. Double taxation agreements can cover income tax as well as capital gains and corporation tax.
Double taxation agreements typically cover the following scenarios:
Exclusive Taxation
This is when only one jurisdiction has the right to tax certain types of income
Shared Taxation
This can mean that two (or more) countries may tax an individual’s income, but their country of residence must provide a tax credit to offset the double taxation
Exempt Income
Certain types of income may be exempt from taxation in one country under a specific treaty.
Key Concepts Of Double Taxation Treaties
To fully benefit from Double Taxation Treaties, it's important to understand a few key factors that determine how and where you will be taxed:
Tax Residency:
Your tax residency is the status which determines which country has the right to tax your income. To help establish this, the UK has a Statutory Residence Test, which considers factors such as number of days spent in the country and any ties you may have. Your residency status will affect your tax obligations in both the UK and other countries.
Permanent Establishment:
If your business is based abroad and operates from a fixed place (such as an office, warehouse, restaurant or factory), this will likely qualify as a ‘permanent establishment’, and therefore trigger tax obligations in said country.
Tie-breaker Rules:
In cases when it’s difficult to define a tax residency status between two countries, tie-breaker rules can be used. These are found in most DTTs and consider factors such as number of days spent in respective countries, residential homes, and economic and familial ties.
Foreign Tax Credit:
If you have already been taxed in another country on income which is subject to UK tax, you may be able to claim a foreign tax credit. This will reduce your UK tax liability by the amount you have already paid, preventing double taxation.
How To Claim DTA Relief
To take advantage of a double taxation treaty effectively, there are a few essential steps to follow.
Firstly, you’ll need to find and complete the appropriate HMRC form (typically this will be the DT Individual form). You’ll also need to determine your tax residency status using the UK’s Statutory Residence Test, as well as reviewing the specific treaty between the UK and your country of residence.
Ensure you understand the details of the treaty regarding the type of income that you earn - whether that may be a salary, pension, dividends or rental income.
If there is no applicable treaty available to you, you may still be able to claim foreign tax credit relief for any taxes you may have paid abroad.
To support your claim, ensure that you keep accurate records of any income earned and taxes paid in each country.
Be mindful of the different reporting requirements countries may have, as any errors could result in fines or delays in receiving your tax relief.
Due to the complexities of these agreements, it's wise to consult a tax advisor specialised in expat taxes who can tailor a strategy for your individual needs and circumstances.
Common Pitfalls To Avoid
Whilst double taxation treaties can bring great financial relief to expats, there are a few common mistakes which could lead to issues.
Failing to correctly establish your tax residency can lead to inaccurate filings and potential double taxation or penalties. If you are unsure of your status, our advisers can help clarify.
Another mistake is overlooking treaty reliefs. Ensure you are fully aware of what your specific treaty offers, to take full advantage of the reliefs and avoid paying more tax than you should.
Finally, be wary of double counting when applying for foreign tax credits. Any errors may lead to double taxation or penalties.
Double Taxation Advice For Expats
At The Wealth Genesis, all our advisers specialise in international taxation and helping British expats become as tax efficient as possible.
We can help ensure that your wealth is protected, and that you don’t pay more tax than you should.
