Let's face it: paying taxes is unavoidable, but getting taxed twice on the same source of income should be. That's where double tax agreements come into play. These treaties protect you from being double-taxed and can also benefit high-net-worth individuals and expats in Europe.
Today, we're focusing on double tax treaties, how they work, and how they can benefit you as an expat.
What are double tax treaties?
A double tax treaty is also called a double tax agreement (DTA). It is a bilateral pact between two countries and its primary function is to help individuals avoid being taxed twice on the same income. DTAs also protect against tax evasion and avoidance.
A double tax agreement often cuts across many different types of income, including wages and salaries. DTAs can also cover proceeds from business operations, pensions, capital gains, and income from investments such as interest and dividends.
How do DTAs work in the UK?
All double tax treaties are different, but their main purpose is to define which country has taxing rights. In the UK, you must take a statutory residence test (SRT) and consider factors like your domicile status to determine your tax residency status.
For persons with dual residency, a 'tie-breaker test' determines which country has taxing rights. Once established, individuals may claim tax relief, typically in the form of tax exemption or credit, from the relevant tax authority.
Every country has the freedom to ink their own DTAs. The United Kingdom has the most extensive list of double tax agreements, with DTAs in place with roughly 120 countries. These include the USA, Switzerland, Hong Kong, Malaysia, Thailand, and the UAE, among others.
Most DTAs follow the Organisation for Economic Co-operation and Development (OECD) Model Taxation Convention, but some countries, like the USA, have separate standard forms.
Why should expats in Europe care about double tax agreements?
Expats in Europe often face circumstances that can trigger double taxation. For instance, you may be a resident of a country like Portugal or Spain, which taxes worldwide income while earning from another country, or being classified as a resident in two countries.
Understanding DTAs is crucial for expats to avoid paying more tax than necessary or not paying tax in the right place.
DTA Benefits for expats in Europe
Clear tax treatment: DTAs clearly state which country has taxing rights on specific income. This allows expats to know where their income will be taxed and how much is due.
Reduced tax rates and exemptions: Depending on the location, tax treaties often provide reduced tax rates and exemptions on certain types of income. This can result in substantial tax savings for expats working in low-tax jurisdictions.
Wrapping up
While double tax agreements provide protection and benefits, they can be complex. Seeking expert advice is recommended to ensure tax efficiency for your specific situation as an expat.