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Double Taxation Explained
Double Taxation Explained
Income earned in one country while you are domiciled in another can sometimes prove to be expensive since both countries may want their share of tax.
Double taxation treaties were introduced to reduce taxation on trade and investment between countries and now form an essential part of international taxation. Most countries have double taxation treaties with many other countries and the UK, with treaties with over 100 countries, has one of the largest networks in the world. Ireland has around 45 treaties currently in operation.
Under the terms of a double taxation treaty, the country where the tax is levied deducts its share of the tax first. Your country of residence then levies its tax and you are required to pay the balance due. For instance, if a property is sold with a net capital gain of €100,000 in a country where CGT is levied at 20%, your liability for CGT in this country is €20,000. As a resident in the UK, you may also be liable for British CGT at 40% (€40,000). However, as you have already paid CGT in the country where your property was situated, you may only be liable for €20,000 (€40,000-€20,000) in the UK. You may also be able to deduct CGT allowances.
A common example is overseas property. If you are a UK tax resident and sell a property in Spain, you are liable for capital gains tax (CGT) both in Spain and in the UK. However, since the UK and Spain have a double taxation treaty you avoid having to pay the full amount of tax in both countries. This means that Spain and the UK will share your final tax bill.
If the two countries in question do not have a double taxation treaty, you are usually liable for the full amount of tax in both countries. In the above example, this would mean paying a total of €60,000 in CGT. However, you may have a CGT allowance whereby the first ₤9,600 is annually exempt (tax free).
According to double taxation agreements, you cannot choose which country you pay tax in first and this can sometimes mean that double taxation treaties do not work to your advantage. For example, if you sell a property in a country where CGT is 40% but you are resident in a country with a rate of 20%, you would have to pay a total of €60,000 on capital gains of €100,000.
As with all taxation issues, double taxation treaties are complicated and you should seek professional advice from a financial expert to ensure that you pay as little tax as is legally possible. Obelisk Private Finance offers comprehensive advice on double taxation.
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