For expats living and working across more than one country, taxation on income can be a concern. In countries that have worldwide taxation rules in place, a non-resident who is working overseas could be liable to pay tax on their income in both their home country and the country where the money is earned. This can be a costly issue that has the potential to cause significant financial strain.
Thankfully, governments around the world have recognised that this arrangement could be significantly detrimental to those wishing to live and work across more than one country, which could even affect trade and the economy if not tackled. As a result, many countries have created a set of rules that are specifically designed to prevent the same income from being taxed more than once. These rules are known as double tax treaties and are an important part of planning for your future as an expat overseas.
As double taxation can have such a significant impact on your future as an expat, we’ve put together a guide to give you a quick snapshot of this complex topic and help you establish how it might affect you.
What are double tax treaties?
Double tax treaties (also known as double tax agreements) are deals made between two countries that create a shared definition of tax rules for tax residents of both countries. These treaties are designed to ensure that expats are not forced to pay tax on the same income in two jurisdictions. While we will assume for this guide that you are a tax resident in the UK and an additional country, tax treaties can be created between any two countries. They can be complex but often follow similar guidelines, with the main aim always to prevent residents from facing a double tax bill because of their relocation.
Taxation for dual residents
It’s not uncommon for expats to be tax residents in more than one jurisdiction or a “dual resident”. This occurs when you are a resident of two countries at the same time, or you have income or gains from another country and are subsequently considered to be liable for tax on the same income in both countries.
For example, if you are an expat living overseas but with rental income from a property in the UK, you will likely be expected to pay tax in both countries. Known as ‘double taxation, this setup can be concerning for expats hoping to remain overseas but understandably wishing to avoid large tax bills.
Thankfully, if you have chosen to live or work in a country that has a double tax treaty with the UK, the treaty divides taxing rights over your gains and income across the two countries. This form of relief will limit the rights of either country to tax your income, so you will only pay tax to one jurisdiction.
How do double tax treaties work?
While the process is simple in theory, double tax treaties are complex agreements that effectively override domestic law in both countries. In some cases, the treaty will simply allow the dual resident to pay tax to one country, thus halving your tax liability. However, it is also possible that each country will have different tax rates. Where this is the case, the treaty may state that you will pay the lower tax rate in one country, as well as the higher tax rate in the other. In the higher-rate country, however, you will have the sum paid to the other country deducted from your tax bill. As a result, you will only end up paying the equivalent of the higher rate of tax rather than the sum of two tax bills.
Claiming tax relief
If you are considered a dual resident or a treaty resident – i.e. someone who is considered to have two home countries – you could claim tax relief via a double taxation treaty. Where you believe your income is exempt from foreign tax but is taxed in the UK (such as pensions), or you are required by your other country of residence or work under their taxation agreement, you will need to apply for tax relief.
To apply for relief, contact the foreign tax authority to get an application form or apply by writing a direct letter. You must ensure you are eligible before you apply, either by contacting the authority to confirm the eligibility criteria or by including proof.
What is eligible for relief?
Many different types of income and gains are eligible for relief or refunds under double tax treaties. While this different from agreement to agreement, this list includes:
Pensions – most pensions are only taxed in the country that provides them
Wages and salary – one-off or ongoing income from work
Interest – interest provided by banks or building societies
Dividends – special rules apply based on the countries in questions
Property income – gains from the rental or sale of a property
What if I have already been taxed twice?
If you have already paid tax on income or gains but believe you may have been erroneously taxed twice across two countries with a double tax treaty in place, you could be entitled to claim a refund. Contact the tax authorities in both countries to find out whether your income is eligible for tax relief and, if so, both countries will provide a refund based on the agreement they have in place.
What countries do double tax treaties cover?
Each country has its own rules regarding double taxation, including a list of countries with which it shares treaties. If you are a dual resident with the UK, this list is governed by HM Revenues & Customs (HMRC). While there are many countries included, some of the most popular among British expats include:
● New Zealand
● South Africa
● United States
Is there any other form of tax relief available?
If you are living or working overseas in a country that does not have a double tax treaty with the UK, you may still be able to apply for tax relief via a form of a foreign tax credit. Known as unilateral relief, this form of tax relief is provided by the home country regardless of the lack of a double tax agreement. To find out if you may be eligible for unilateral relief, contact HMRC with proof of your income or gains and they will confirm whether you can claim.
Capital Gains Tax
You only pay Capital Gains Tax if you make financial gains from UK-based property and land, but not on any other form of UK asset. As a result, you should not have to claim any assets that you do not pay tax on. However, it is important to check the relevant double tax treaty to make sure you do not have to apply for relief or a refund. Should you choose to return to the UK after spending time as a non-resident, you may be expected to pay tax on any assets you owned before you left, even if you have paid tax on gains in the country you have resided in. If this is the case for you, contact HMRC to see if you can claim double taxation relief on these assets.
Need to find out more?
At ExpatRoute we pride ourselves on guiding a variety of topics that affect British expats, including issues concerning taxation and finances. However, if you feel you may need more information about your personal status, we recommend you contact an independent advisor who can provide tailored advice.