What Are Double Tax Treaties in the UK?

If you are a tax resident of the UK and have a business registered in the UK or overseas, your income might not be double taxed in the UK as a result of the double tax treaties in place. What exactly are Double Tax Treaties?

What Is Double Taxation?

Double taxation takes place when local regulations result in taxes being levied on the same earnings, company profits or capital gains in more than one country. This can be mitigated via double tax treaties with other countries to avoid double taxation, allowing countries to offer different tax relief types.

Double taxation can occur when:

• An organisation with subsidiaries around the world find its branch profits taxed in each territory as well as the place where the business is from
• An organisation or an individual considered to be a resident in more than one country (i.e. dual resident) and being taxed in both territories
• An individual in one territory who receives income from an overseas territory (e.g. pensions, dividend payments, rental income etc)

What Is A Double Tax Treaty?

A double tax treaty is also known as a double tax agreement (DTA), and is one that is established between two countries to define tax rules concerning a tax resident of both countries. Double tax treaties can be complicated and may require professional assistance, but they are put in place in a bid to make sure that an individual is eligible for tax relief rather than paying tax on the same earnings in two different territories. Double tax treaties may vary in different jurisdictions, but most adhere to similar guidelines.

In the UK, HM Revenue & Customs (HMRC) maintains a collection of the UK's tax treaties.

Advantages of the Double Tax Treaty

1. Elimination of double taxation

The DTA provides tax relief to tax residents of jurisdictions that go into an agreement with each other. This tax relief takes place in the event where earnings would otherwise be liable for tax in both the contracting countries.

Any tax payable in accordance with the legislation of a contracting country on the earnings, company profits or capital gains an individual obtains from sources within the foreign territory is permissible as a credit against the tax that the UK may impose on the same earnings, company profits or capital gains. In a similar vein, the tax payable in the UK on such earnings, company profits or capital gains will also be permissible as a credit against the foreign territory’s tax that is levied.

2. Other benefits

The two main advantages of the Double Tax Agreement (DTA) includes the taxability of

1. Business profits
2. Earnings from sources including interest, dividend, royalties, and the like. When it comes to businesses, the DTA can grant tax relief when the organisation is taxed on the business profits that occur in both the contracting countries.

How To Claim Tax Relief Under Double Tax Treaties

1. UK residents taxed on foreign income

If you are taxed twice, you are usually eligible for tax relief to claim some or all of the tax back. How you claim depends on whether your foreign earnings have already been taxed.

Apply for tax relief before your foreign earnings get taxed

You are required to apply for tax relief in the foreign territory where your earnings come from in the event that:

• the earnings are not subject to foreign tax but are taxed in the UK (for instance, most pensions)
• mandated by the foreign territory’s double taxation agreement

Approach the tax authority of the foreign territory for a form, or apply via letter in the absence of a form. You will be required to prove your eligibility for tax relief through one of the following ways:

• Insert a UK certificate of residence in your letter application
• Complete the form and send it to HMRC for their verification of residency

After you have received the proof of residency, you can then send the form or letter to the tax authority of the foreign territory.

If you have already paid tax on your earnings from a foreign territory

In this circumstance, you will usually be eligible for Foreign Tax Credit Relief after you report your foreign income in your tax return. The amount of relief you get is dependent on the UK's DTA with the foreign territory where your earnings are generated from.

However, you may not be able to recoup the full amount of foreign tax paid. You may receive less in the event that:

• The earnings would have been taxed by the UK at a lower rate
• A smaller amount is established by the foreign territory’s DTA

Dual Residents

If you are a resident in both another country and the UK, you will have to check the other country's tax year and residence rules.

You can then use the Self Assessment helpsheet to file for relief on dual residency, in the event that there is a DTA between the UK and the other country you reside in.

Capital Tax Gains

You are usually required to pay tax in your country of residence and exempted from tax in the foreign territory where you acquire the capital gain. In this instance, you are usually not required to make a claim.

However, the rules are different if your capital gain is derived from an asset that falls under the following conditions:

• You are using it for business in the foreign country
• Cannot be transported out of the foreign country, including land or a house

In these instances, you will have to pay tax in both countries and claim tax relief from the UK.

2. Foreign Residents Taxed On Uk Income

If you are being taxed twice...

If you are a resident of a country that is in a double taxation agreement with the UK, you will not be required to pay tax twice. You can either apply for a refund after you have been taxed or partial or full relief before getting taxed, depending on the DTA. Each DTA outlines the country you are required to pay tax in, the country you apply for tax relief in, as well as the amount of tax relief you get. In the event that the tax rates in the two countries differ, you are required to pay the higher tax rate.

You can file a claim for...

• Most pensions - most government pensions (such as civil service) in the UK  are only taxed in the UK
• Bank interest
• Salary and other sources of income (including self-employment)
• Dividends, with special rules that apply under HMRC’s section 10 of ‘Residence, Domicile and the Remittance Basis

Claiming tax relief

To apply for treaty relief, you can use form DT-Individual.

After you have filled in the form, send it to the tax authority of your resident country, who will confirm your eligibility and either return it to you or send the form to HMRC.

Dual Residents

For dual residents, this process is the same as UK residents.

If you are a resident in both another country and the UK, you will have to check the other country's tax year and residence rules.

You can then use the Self Assessment helpsheet to file for relief on dual residency, in the event that there is a DTA between the UK and the other country you reside in.

Capital Tax Gains

You are only required to pay Capital Gains Tax in the event that you make a profit on UK land or property. You will be exempted from Capital Gains Tax on other UK assets, including UK shares. Typically, you are not required to file a claim for assets you are not paying tax on, but it may be worth checking the relevant DTA.

Should you return to the UK after being a non-resident, you may be required to pay tax on the assets you owned prior to leaving the UK, even if you have already paid tax on the gains in the foreign territory you moved to. In this instance, you are usually allowed to claim double taxation relief.

If you need more support in claiming double taxation relief, you can always count on professional tax help from one of our chartered accountants!

Countries That Have A Double Taxation Agreement With The Uk

While there are thousands of double tax treaties available worldwide, the United Kingdom (UK) has double tax treaties with over 130 countries. This makes it one of the largest networks in the world.

The most updated list on the UK Government's website can be found here.

The Impact Of Brexit On Double Tax Treaties

Brexit has no effect on the UK's extensive double tax treaty network since it is not based on the European Union Membership. As such, the UK will still benefit from and be under the obligation of the double tax treaties that are already set in place.

Need Additional Support With Your Taxes?

Since there are many regulations and complexity that can occur when you are trying to apply for double tax treaties, it is crucial to get professional assistance from an experienced and qualified accountant. If the above information is too overwhelming for you, fret not.