Double tax treaties explained - what are they?
Taxation is complicated enough in one country, but if you fall under two tax jurisdictions, it can become more complex still. And with greater transfers of information than ever before between different tax-enforcement authorities, it is essential to have your financial affairs in order.
Double tax treaties are agreements put in place to help individuals avoid being taxed twice by different authorities. They contain numerous different reliefs and exemptions which is important to be fully aware of in order to avoid paying more tax than you need to.
What is a double tax treaty?
A double tax treaty is an agreement between two tax authorities designed to avoid certain double taxation risks. The authorities in question are typically those of two separate countries. However, a treaty may also be between smaller units, such as those between the UK and its Crown Dependencies (Guernsey, Jersey, and the Isle of Man).
Double tax treaties can avoid the problem of double taxation where income may be taxable in two different jurisdictions. They also offer clarification of taxation terms for cross-border trade and investments and prevent discriminatory high tax rates that may otherwise penalise UK businesses abroad.
The majority of double tax agreements use the OECD (Organisation for Economic Co-operation and Development) model, an intergovernmental convention which provides guidelines for individual countries to form agreements. This means double tax agreements can mostly be relied on to conform to the same standard.
Is there a UK - US double tax treaty?
It is important to note that the USA does not use the OECD model, but instead has a separate standard form. The USA then requires the UK, like other countries, to be signatories to its own agreement for double taxation provisions. If you are looking to claim double tax relief between the US and UK, you must therefore have a clear understanding of the differences between this agreement and the OECD standard.
Am I eligible to claim relief under double tax treaties?
To be eligible as a “person” under the treaty (either a company or individual), that person will normally be classed as a dual resident. In other words, each country in question will have registered the individual or company as a resident for tax purposes under their domestic law. The company or individual will be defined as a 'treaty resident' of one or both signatory countries. To avoid double taxation with dual residency, the individual or company will then be subject to a 'tie-breaker test' to determine a single treaty residence.
Once treaty residence is determined, the company or individual may claim relief by tax credits or exemptions, from either the foreign tax authority or HMRC. The main reliefs fall on corporation tax, income tax and capital gains tax. Treaty benefits including residence can be a complex determination, drawing on many specific factors in your situation as well as case law. It is important therefore to seek expert advice before claiming treaty benefits and residence on the tax return.
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