Double taxation treaties clarify cross-border taxation systems and primarily exist to prevent an individual from being taxed twice in two states and mitigate tax evasion. A clear treaty on which country has the right to tax establishes a fair international tax and business treatment. Other double taxation relief applies, too, if the country is not under a UK treaty.
This article explains what is double taxation in the UK, how the tax treaty and unilateral relief works, and which countries have double taxation avoidance agreements with the UK. It also covers other frequently asked questions relevant to the topic.
What Is Double Taxation
Double taxation usually occurs due to the following:
- Being a resident in two countries at the same time; earning income from the UK and being a tax resident in another country.
- Earning income or gains from another country that also taxes them based on their source.
For instance, people who relocate to the UK for work, living and working in the UK (residence country) and earning rental income from a property abroad (source country). In this case, they may have to pay taxes on that income in both the UK and the country where the property is located.
Before the non-domicile regime is abolished by 2025, UK non-doms, or people who live in the UK but are not permanently settled, can opt for a remittance basis instead of receiving foreign incomes in their UK accounts. This allows them to receive offshore profits without being charged taxes.
What Is Double Taxation Relief
The double taxation rules ensure that taxpayers do not pay twice or get taxed excessively on their foreign incomes, as they override existing tax laws in both source and residence countries. There are two ways the double taxation system is exercised. It is either through:
- Double taxation agreements with countries, or
- Unilateral relief
Both are further discussed below. As individual situations vary and foreign taxation follows complicated rules, seeking help from tax and financial advisors is most recommended.
What Is Double Taxation Agreement
Double taxation agreements (DTAs) define which country holds the primary right to tax specific types of income. Typically, the source country, where the income is earned, has the first claim to tax, but the agreement also considers the following factors:
- the taxpayer’s residency
- nature of the income (e.g., employment, investment, pension)
If the taxpayer resides elsewhere, that country may also seek to tax the income but usually provides relief for taxes already paid in the source country.
Understanding double taxation rules is crucial for individuals with financial interests across borders, whether they are UK residents earning abroad, expatriates managing tax obligations, or individuals with diverse international investments.
For UK expatriates, the DTA offers them relief from income tax, capital gains tax, and inheritance tax implications. For foreign nationals in the UK, the DTA determines their tax residency, income taxes, and capital gains tax obligations.
Countries on a Double Taxation Agreement with the UK
The UK has a vast network of agreements around the world, managed by HMRC. Currently, they include the following countries:
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Albania |
Algeria |
Antigua and Barbuda |
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Argentina |
Australia |
Armenia |
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Austria |
Azerbaijan |
Bahrain |
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Bangladesh |
Barbados |
Belarus |
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Belgium |
Belize |
Bolivia |
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Bosnia and Herzegovina |
Botswana |
Brazil |
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British Virgin Islands |
Brunei |
Bulgaria |
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Canada |
Cayman Islands |
Chile |
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China |
Croatia |
Cyprus |
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Czech Republic |
Denmark |
Egypt |
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Estonia |
Eswatini (formerly Swaziland) |
Ethiopia |
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Falkland Islands |
Faroe Islands |
Fiji |
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Finland |
France |
Gambia |
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Georgia |
Germany |
Ghana |
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Gibraltar |
Greece |
Grenada |
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Guernsey |
Guyana |
Hong Kong |
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Hungary |
Iceland |
India |
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Indonesia |
Iran |
Ireland |
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Isle of Man |
Israel |
Italy |
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Ivory Coast |
Jamaica |
Japan |
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Jersey |
Jordan |
Kazakhstan |
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Kenya |
Korea (South) |
Kosovo |
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Kuwait |
Kyrgyzstan |
Latvia |
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Lebanon |
Lesotho |
Liechtenstein |
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Lithuania |
Luxembourg |
Malaysia |
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Malta |
Mauritius |
Mexico |
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Moldova |
Monaco |
Mongolia |
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Montenegro |
Montserrat |
Morocco |
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Myanmar |
Namibia |
Nepal |
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Netherlands |
New Zealand |
Nigeria |
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North Macedonia |
Norway |
Oman |
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Pakistan |
Panama |
Papua New Guinea |
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Philippines |
Poland |
Portugal |
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Qatar |
Romania |
Russia |
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Rwanda |
Saint Kitts and Nevis |
Saint Lucia |
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Saint Vincent and the Grenadines |
Saudi Arabia |
Senegal |
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Serbia |
Seychelles |
Sierra Leone |
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Singapore |
Slovak Republic |
Slovenia Solomon Islands |
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South Africa |
Spain |
Sri Lanka |
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Sudan |
Swaziland |
Sweden |
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Switzerland |
Taiwan |
Tajikistan |
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Tanzania |
Thailand |
Trinidad and Tobago |
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Tunisia |
Turkey |
Turkmenistan |
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Turks and Caicos Islands |
Uganda |
Ukraine |
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Ukraine |
United Arab Emirates |
United States of America |
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Uruguay |
Uzbekistan |
Venezuela |
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Vietnam |
Zambia |
Zimbabwe |
For more information, please visit the UK government’s list of tax treaties.
What Is Unilateral Relief
Another method to relieve double taxation is through unilateral relief, which works via foreign tax credits under domestic law. It specifically applies when tax relief is not provided under a double tax treaty or when the treaty does not cover the specific category of income or foreign tax involved, such as local or provincial taxes.
Even without a double taxation agreement, tax relief is available to the following people:
- UK tax residents, and
- Foreign residents with a UK branch, agency, or, for companies, a UK permanent establishment, that pays tax in another country.
However, unilateral relief does not apply to foreign taxable gain or income linked to a foreign-exempt permanent establishment of a UK company, nor does it apply to offshore dividends.
The relief works by providing a foreign tax credit against, and thereby allowing deductions on, UK income tax, corporation tax, or capital gains tax for foreign levies suffered on the same income or gain.
Double Taxation Relief Example
Take, for instance, an individual moving to the UK for employment purposes. The person will be generally required to pay UK tax on their employment income, even if it is also taxed in their home country. Their residence country should provide double tax relief by granting a credit for the UK taxes paid.
However, given their country has a double taxation agreement with the UK, they may be exempt from paying UK tax if:
- They spend fewer than 183 days in the UK, and
- Their employer is not based in the UK.
As individual circumstances vary, taxpayers must seek tax professionals’ guidance to navigate the intricate UK double taxation laws.
Frequently Asked Questions
Whether an individual needs to pay UK tax depends on their tax residency status. Non-UK residents are not required to pay UK tax on their foreign income. UK residents typically pay tax on their foreign income, unless their permanent home (domicile) is abroad.
To eliminate double taxation, tax treaties use two main methods: allocating tax rights between the contracting states and requiring the residence state to provide tax relief, either through exemption or tax credit, when the source state taxes the income.
Dividends are susceptible to double taxation because they are paid dividend tax both at corporate and personal levels. It is believed that without taxes on dividends, wealthy individuals could use their stock ownership as a tax shelter.
Double taxation can be avoided when a business is structured as a pass-through entity. In this arrangement, profits go directly to the owners or shareholders and are not subject to business tax. Instead, the owners pay taxes on the profits at their individual income tax rate, thereby avoiding double taxation.
Residents of a country that has a double taxation treaty with the UK, which provides relief from UK Income Tax, can apply and claim a refund of their UK Income Tax through the form DT-individual.
How Legend Financial Can Help
The laws around double taxation are relatively complex and variable. Legend Financial’s tax experts will walk you through what is double taxation according to your specific circumstances and assist you in claiming appropriate forms of double taxation relief. Reach us today!
