Each country of the world has its unique tax laws and regulations. An individual or legal entity residing in one country and having income or capital gains in another country may be liable for paying taxes on the same income or capital gain in both countries. This is “double taxation." To avoid or mitigate the effects of a doubled tax burden on individuals or businesses most countries have entered into “double taxation agreements” (DTA, also “tax treaties”) with other countries.
For instance, an DTA may provide for the following measures to avoid or mitigate double taxation: An individual paying tax in his or her country of residence or domicile gets an exemption or relief from tax in the foreign country where he or she earned income. Or, the individual pays tax in in the country where he or she earned income or gains and gets an exemption or relief in the country where he or she resides. In either case, taxes normally will be deducted automatically from the income or gains “at the source,” i.e. in the country where the individual earned those income or gains. The individual will then need to declare these foreign taxes in his or her tax return in the country of residence.
Tax reliefs may be granted for some types of income specially defined in the DTA, such as earnings from employment or professional services, pensions and annuities, interest, royalties, and dividends. For each DTA the rules for tax relief on each of these types of income vary and can be complicated.
Most DTAs also provide for a “saving clause." Such clauses are meant to prevent a citizen or resident entity of one country from abusing the DTA provisions in order to fully avoid taxation of foreign income.
Individuals or businesses earning income in one country while residing or being domiciled in another should seek the advice of an experienced tax professional and an international attorney regarding the implications of international taxation. At Counselhouse, our tax & legal team can support you in assessing your international tax status. Please contact or tax & legal team for further information.