Double Taxation

Foreign Tax Credit

If you need help understanding your tax obligations under the Double Taxation Agreement or have questions about the Remittance Basis, you can call our office for specialist advice about your personal circumstances.  Read our FAQ to understand the purpose of the Double Taxation Agreement.

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Foreign Income & Tax Credit

Double Taxation Agreement

The use of Double Taxation Agreement, sometimes known as DTAs, is an essential component of tax planning for foreign transactions. They are agreements made between two jurisdictions to prevent particular categories of income or profits from being subject to double taxation. Double Taxation Agreement may also make it possible for the governments of the countries concerned to share information to ensure compliance with local laws and prevent tax evasion or avoidance. If you work internationally, or if you are an international business person, investor, student or academic, then it’s important that you understand DTA’s. They can help reduce your tax exposure by making sure that certain income and gains are taxed only once. DTA rules are critical for professional service providers. A DTA may allow an artist or doctor, or an engineer to claim a reduced withholding rate on their foreign source income earned through performance or consultancy fees.

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A DTA overrules each country’s tax legislation and outlines how an individual should be taxed in each jurisdiction. Identifying which country has the main taxing rights for double-taxed income is the first step. It clarifies where they’ll suffer an initial tax liability and whether they’ll pay further tax in the second country. In establishing where an individual’s income should be largely taxed, residency is typically an essential issue. In the UK, the Statutory Residence Test is applied; in the US, Substantial Presence. Other countries have their own residence requirements. Where you are resident will be established by a set of “tie-breaker” tests stated in the applicable Double Tax Agreement with the UK. Standard Treaty tests include nationality, permanent home, or vital interests.

Tax relief may be attainable via the use of a foreign tax credit even if there is no double taxation agreement in place. For instance, if you pay tax on your foreign income at a rate of 15% in the country in which the income is earned, you may still be required to pay tax in the UK if you are a resident here. This is because the UK has a higher marginal tax rate. If the tax rate in the UK is 20%, you will get relief (also known as a foreign tax credit) for the 15% of the tax that you paid in another country, which means that the total amount of tax that you will be required to pay in the UK will be reduced to 5%.

If you move to the UK and have income from employment that is taxed in your home country, you will usually still need to pay UK tax. Your home country should credit UK taxes paid. If you live in a country with which the UK has a double taxation treaty and have a non-UK employer, you may be eligible for UK tax relief if you spend less than 183 days in the UK. If you arrived in the UK and lived longer than you intended due to coronavirus travel restrictions, you may not need to pay UK tax on the employment income you received subject to your departure schedule.

A UK domiciled individual working overseas must establish which country they are a “Treaty Resident”. They may be a UK Treaty Non-Resident if they fulfil specific conditions regarding their principal residence and time spent outside the UK. Assuming a DTA exists between the two countries, in the UK,  tax is to be paid on UK income only if you have spent more than 183 days outside the UK.  High-net-worth citizens living abroad may benefit from a DTA. If there is a double tax agreement with the UK, tax is only payable on UK income, not on foreign employment income, subject to a clause related to dependent services.  

Students from outside the United Kingdom should be aware of the unique tax and national insurance laws and visa regulations that apply to them while studying in the United Kingdom. Each case is different; therefore, students should contact the UK Council for International Student Affairs or a tax expert to determine their tax obligations. If you are unsure about your situation or would need any additional explanation, please do not wait to contact us , and one of our tax team would be happy to assist.

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