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Seeing Double: How do tax treaties restrict double taxation?

Posted on 14 January 2022

What are double tax treaties?

Double Taxation Agreements (DTAs) or treaties (DTTs), are agreements made between two jurisdictions designed to reduce the tax levied by more than one jurisdiction on individuals, companies, and other entities on the same source of income, profit etc.

The UK's DTAs are largely based on the Organisation for Economic Co-operation and Development (OECD) taxation convention. Some jurisdictions have amended this or implemented their own double taxation treaty with the UK. For example, the US/UK DTA is in some ways based on the US Foreign Account Tax Compliance Act (FATCA). FATCA is designed to force foreign financial institutions such as HMRC to report information or US reportable accounts to the IRS regarding any US individuals residing in the UK.

Tax Liability

In the UK an individual's tax liability is primarily determined by their domicile and tax residence status. By contrast, a non-UK individual's tax liability may be determined by their citizenship only (such as the US).

This often results in dual residents, or UK residents receiving offshore income or gains (and vice versa), being taxed twice on the same funds (i.e. the UK and the offshore jurisdiction). The extent to which such taxes apply are however subject to double tax treaties and (where applicable) unilateral relief.

DTA Treaty Relief

A DTA can provide a UK individual residing in a jurisdiction with which the UK has a treaty with treaty relief from double taxation.

The treaties tend to consider different types of persons and different profits separately, and certain tax treaties apply to certain taxes only. For example, typically the two jurisdictions may have one DTA that covers income tax and capital gains tax (CGT), and a separate one to deal with estate, gift and inheritance tax matters.

Treaty relief must be claimed by the relevant person in the relevant jurisdiction, and any relevant conditions must be satisfied.

The relief can either limit or eliminate the tax liability in the country in which the income/gains arose or the country in which the individual is resident. Relief may be limited according to local rules.

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