If you are a UK resident but live, work or generate income in a country other than the UK, you may need to familiarise yourself with the Double Taxation Agreement (DTA).
Taxation on income can be an issue for international workers and individuals who may be resident in more than one country. In countries that have worldwide taxation, a non-resident citizen who is working abroad could be liable to pay tax on their income in their home country as well as in the country in which it is earned.
Governments have recognised that this would be unfair and would discourage international trade/business. Consequently, they have each created their own rules to avoid the same income being taxed twice. In some cases, the amount of tax paid in one country can be offset against what is due in another country. These agreements or contracts are known as Double Tax Agreements (DTAs) and should be factored into your tax planning regime.
The double taxation agreement can be complicated. Those with dual residency will need to ensure that the correct amount of tax is paid, reclaimed or offset in each country. In some cases more than two countries are involved. For example, a foreign national may be living in the UK as an expat and deriving an income from a third country and would need to be familiar with DTA law to ensure that only the correct amount of tax was paid in the relevant country.
Which countries have a DTA or Double Tax Treaty with the UK?
All countries have different rules when it comes to double tax treaties so it’s important to follow the exact policies between the countries involved. There’s an up-to-date list of countries (revised October 2018) that have a double tax treaty with the UK.
Claiming tax relief when countries have different tax rates
In some cases it is possible to for the individual to claim tax relief, however how much relief you receive is dependent on the UK’s DTA agreement with the country in which your income is derived from. The situation becomes more complicated when different countries have varying rates of tax. So what happens then? To further understand the double taxation agreement, we have outlined a typical example:
If a resident of country A does business with someone in country B and makes a profit, that gain is taxable in country A (as the country of residence) and in country B (where the profits were made). If country A has a tax rate of 30% and country B taxes at 25%, the transaction could in theory be taxed a total of 55%. This would obviously deter international trade, so most developed countries have agreed bilateral terms defining how any profit should be fairly taxed. In general, no more than the maximum tax (30%) would be paid in total.
Taxation for dual residents
Individuals living or working abroad that have dual residency are liable to pay tax in both countries. To resolve which country takes precedence for tax, the DTA between the two countries will have a set of rules or “tie-breaker tests” to define where tax should be paid in order to avoid paying tax in both countries. Check out the UK Government help sheet to find out whether the second country has a DTA agreement with the UK.
Those with dual residency in the UK and another country that have a DTA agreement will be able to claim full or partial tax relief on income. This includes bank interest, royalty payments, most work pensions and annuities.
If you reside in a country that does not have a DTA with the UK (such as Brazil) you can only claim relief by getting a credit for the foreign tax paid on your overseas income.
DTAs for UK residents working or living abroad
When a UK resident works abroad they need to determine in which country they are a “Treaty Resident”. If they meet certain criteria regarding their main residence and the amount of time spent outside the UK, they may be deemed to be a UK Treaty Non-Resident. In this case, a DTA between the two countries may decide that tax is only due to the UK HMRC for the days worked in the UK.
In the case of high-net worth-individuals living abroad, a DTA could make some countries more advantageous to reside in. If the second country has a double tax treaty in place with the UK, tax would only be levied on income generated from UK activities. The remaining income would be sheltered from UK tax.
DTAs for students
Overseas students who are studying in the UK should be aware that there are special tax and national insurance rules as well as specific visa requirements. Each case is different and students should contact the UK council for International Student Affairs or contact a professional that specialises in international taxation to be sure of their tax liabilities.
If you are unsure about your position, or would like any further clarification please do not hesitate to contact us and one of our tax team will be delighted to help.