Last Updated on 6th September 2024
Most expatriates will have heard of double taxation agreements (DTAs) or treaties. These agreements between two countries are often beneficial since they mean that an individual taxpayer won’t be taxed twice on the same event, income or gain to the full extent of each relevant tax system.
However, although many expats will know that DTAs exist, it is important you understand how the applicable treaty works since each agreement may cover different circumstances or taxable events, with considerable variances between the UK’s agreements with each overseas country.
In most cases, a DTA is applicable in specific scenarios where a person might be considered a tax resident in two jurisdictions due to meeting the criteria in both. Expats may also rely on a DTA to reduce their total tax obligations if they live in one country but have income or assets in another—in which case applying the rules accurately is key.
Double Taxation Agreements Explained
Double tax treaties might sound straightforward – in reality, they are anything but. There are many misconceptions about how a DTA applies and the overall impact on your finances and tax exposure. These include assumptions that:
- DTAs are applied automatically by the tax authorities.
- You only need to file a tax return in one country and not the other.
- Taxable income in one country is exempt from all taxation in another.
- Expats can choose where they wish to be a tax resident.
All of the above are misunderstandings. It is far more common for income to be taxable in the country of source—the location where the earnings originate. That income might also be subject to tax in another country where you are a resident.
Rather than ‘cancelling out’ one tax liability, a DTA typically offsets the tax paid in the country of source against the tax liability arising on the same income in the jurisdiction where you live.
Tax Residency and Double Taxation Treaties
The first consideration is determining where you are officially a tax resident. This isn’t a matter of choice and depends on numerous factors, including how many days of the year you spend in each place, familial ties, business and property ownership, employment, and the location of your primary residential home.
It is possible to be technically deemed a tax resident in more than one place, so even if you believe your tax residency is obvious, it is important to consult a tax specialist who can clarify how the rules apply, often working through a series of tests.
Those tests cover all the factors listed previously but are also subject to tiebreakers, where you meet the tax residency criteria in two places. For instance, if you own real estate in two countries and spend equal time in each, your tax adviser might need to move on to an assessment of where your vital interests lie—covering economic, social, and family links.
In the UK, this system is called the Statutory Residence Test and is often used when expats are employed by a British business but live elsewhere or have considerable assets and investments in a jurisdiction other than their home country.
Examples of How Double Tax Treaties May Apply
DTAs can be complex, and although the correct assessment of your tax exposure and reporting obligations in each country is always subject to your personal circumstances, the illustrations below show how a DTA might work.
A British Resident Earning Income From Overseas
If a taxpayer is a UK resident, they are subject to taxation against their worldwide income and assets. They must submit a tax return annually to HMRC and include all income, wherever it originates.
Should the taxpayer be employed in a country that does not have a DTA with the UK, they may be subject to tax on their foreign income in both countries without any way to offset the tax paid at source against the liability in Britain.
However, if the overseas country does have a DTA, the taxpayer would usually be able to claim back the income tax already paid overseas, declaring this on their self-assessment tax return. HMRC can verify that the information provided is accurate and deduct the taxation from their calculations—any difference would remain payable.
A UK Expat Living Overseas With British Assets or Income
In this opposite scenario, the taxpayer has relocated abroad but still has income originating from the UK or owns British assets such as property. That income might also be a pension fund, investment product or savings account.
The normal process would be for the taxpayer to submit a tax return to HMRC, but only include income or earnings that arise within the UK. Because the taxpayer is a tax resident in another country, their worldwide income and assets are taxable in that location rather than in Britain.
From there, they would need to claim against the DTA and provide evidence of the tax paid to the UK tax office in order to claim a reduction in their tax obligations.
British Citizens With Dual Tax Residency
A more complex scenario might mean that a UK expat is considered a tax resident in two countries. In this case, they need to check the specific rules and provisions if a DTA exists and work with a professional adviser to ensure they apply the residency tests and tiebreakers to avoid paying the full tax rate twice.
Overseas Countries With a Double Tax Treaty With the UK
The examples we’ve given show how important DTAs can be – they might mean the difference between a duplicate tax liability and being able to offset one tax obligation against the other. Fortunately, the UK has an extensive international network of treaties with over 100 countries.
HMRC publishes a complete list of tax treaties, which include agreements with the following locations:
- France
- Italy
- Cyprus
- Belgium
- Canada
- The United States
- Malta
- Spain
- Ireland
- Portugal
DTAs take precedence over domestic rules and are made between the UK and each individual country. There are also multilateral agreements that include more than one country, but events such as Brexit do not mitigate or change the relevance of a DTA.
The Impact of Tax Treaties on Your Finances as an Expatriate
Checking whether or not a DTA exists in any country you plan to move to as an expatriate is essential – these agreements can and do change, so it is advisable to check before making any firm plans.
Claiming tax relief through the proper channels, submitting the right tax returns, and declaring your income and assets are all equally important to ensure you manage your tax affairs, claim relief available, and do not fall foul of the rules, even inadvertently.
Likewise, applying the residency tests to determine your tax residency position is not always straightforward, and we strongly advise you to consult one of our tax specialists to ensure you fully understand your position.
Please contact your nearest Chase Buchanan office anytime for more information about DTAs or to arrange a consultation to ensure your tax affairs are in good order.
*Information correct as of May 2024