How to avoid paying tax twice – double taxation agreements


Introduction

Double tax agreements are international tax legislation which are designed to protect taxpayers against double taxation when the same income is taxable in more than one country.

From a UK tax perspective, double taxation can occur in multiple scenarios including a) if you are resident in the UK and an overseas country at the same time or b) if you are resident in the UK and have income arising in an overseas country or c) if you are resident overseas and have income arising in the UK or d) if you’re a US citizen living in the UK.

To manage double taxation, the UK has entered into a network of double taxation agreements which provide rules to combat/reduce double taxation.

Dual resident status

Globally mobile taxpayers may find that they’re resident in more than one country at the same time. For example, a British taxpayer that leaves the UK for work purposes but often returns to the UK to visit family will likely find that they’re resident in the UK and the overseas country where their work is physically exercised.

Providing that the UK has entered into a double taxation agreement with the overseas country, the taxpayers resident status will be re-assessed at treaty level using the ‘tie-breaker’ test. In non technical terms, one country will win and one country will lose. The winning country will tax the individual as a resident in line with the domestic tax system and the losing country will tax the individual as a non-resident in line with the domestic tax system.

Factors that impact your treaty resident status as as follows:

Accommodation
Centre of interests
Habitual abode
Nationality

Income arising overseas

Many tax systems around the world follow the principal of income arising in a country will be taxable in that country, irrespective of the individuals resident status. For example, if a German national relocates to the UK and continues to receive German dividend income, the dividend income will likely be taxable in the UK and Germany.

Providing that the UK has entered into a double taxation with the country where the income arises, the end result will either be a) one country is exempt from taxing the income or b) both countries can tax the income in line with domestic tax rates and one country has to give a credit for tax suffered overseas or c) both countries can tax the income in line with treaty (reduced) tax rates and one country has to give a credit for tax suffered overseas.

US citizen

The US operates a unique taxation model which imposes Federal and sometimes State taxes on citizens, irrespective of where the citizen resides. As such, US citizens worldwide income continues to be within the scope of US taxation even if the citizen resides overseas.

Albeit the US has entered into over 60 double taxation agreements, including an agreement with the UK, there is often a ‘savings clause’ within the agreements, which enables the IRS to ignore the provisions of the agreement and tax its citizens regardless of the terms agreed with the overseas country.

To mitigate double taxation in this specific scenario, the US often ‘re-categorise’ incomes as foreign which enables a credit to be claimed for tax suffered overseas otherwise, a), b) or c) as described above may apply.

Can I use double taxation agreements to minimise tax exposure?

Firstly, to rely on a double taxation agreement, there must be an agreement in place between two countries. The majority of countries that levy tax have over 50 agreements in place and even tax havens like the UAE have a large number of agreements in place.

Secondly, you must be resident under domestic law in at least one country (either the UK or an overseas country).

Finally, to rely on a double taxation agreement, you must make the necessary claims via completing a self-assessment UK tax return.

How can GTC help?

GTC can assess your tax obligations in the UK in line with domestic and treaty law. We can assist with claims via your UK tax return to reduce your UK tax bill using a double taxation agreement.

Become a GTC client

Book a free discovery call with our team. We will collect background information to develop a greater understanding of the necessary steps to take to optimise your taxes and bring your affairs up to date.


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