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Double Taxation Treaties


Although these treaties are usually known as Double Taxation Treaties, this is really the wrong name. They are more properly described as treaties for the avoidance of double taxation.

These are bilateral treaties - i.e. treaties involving only two governments - that have been entered into between most of the major countries in the world.

There are well over thirteen hundred of these treaties around the world. The U.K. has the largest number of any country (treaties with over 100 countries) but most major countries have treaties with most other major countries.

The basic principle behind these treaties is that it is fundamentally unfair to expect people to pay tax twice on the same piece of income, capital gain or - in some cases - inheritance.

These treaties also deal with other matters such as whether payments made in one country to someone from the other should be subject to withholding tax (money held back in the country where the payment was made) and whether and to what extent the tax authorities in the one country will cooperate with and disclose information to the tax authorities in the other.

The way the treaties work is that they set out what will happen if, under the law of the two countries in question, both can claim the right to tax a particular sum of money.

In this situation the treaties set out certain tests to be followed in deciding which of the two countries will have the sole right or the primary right to tax the income.

In many cases, the treaties will give one country the primary right to tax the item in question but then permit the other country to collect any extra tax that might have been due if that item had been taxed in that country.

The end result is that you do not pay more tax than the amount that would have been charged in the country with the higher tax rate.

An example might help.

In the double taxation treaty signed between the U.K. and Spain in 1975, there is a clause which helps determine where you are to be treated as tax resident - and, therefore, where you will pay your tax.

If, under the law of Spain and the law of England (ignring the treaty), you are in each case determined to be tax resident in that country the clause works as follows:

1. You cannot be treated for any one purpose as tax resident in both places.

2. If the law in both countries treates you as tax resident in their country you are deemed to be tax resident only in the country in which you have a permanent home available to you.

If you have a permanent home in neither or both countries you are deemed to be tax resident in the country that is "your centre of vital interests". This means the country to which you are more tied by reference to your personal and economic affairs.

3. If it is unclear in which country you have your "centre of vital interests" you are deemed to be resident in the country where you usually live.

4. If you usually live in both countries you are deemed to be tax resident in the country of your nationality.

5. If you have dual nationality the two governments have to sort the problem out on a case by case basis!!!

This is just one small example but it gives you some idea of the complexity that can arise in these cases.

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© The International Law Partnership Ltd. Page last revised 5 Feb 2010

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