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9. Double Taxation Relief (DTR) and Double Taxation Agreements (DTAs)
Different countries and states have their own tax rules and laws. When you have income and gains from one country and you are resident in another, or you are resident in both, you may be liable to pay tax in both countries under their different tax laws. To avoid ‘double taxation’ in this situation, the UK has negotiated Double Taxation Agreements with many countries.
DTAs are designed to protect against the risk of an individual or a corporate entity being taxed twice where the same income is taxable in two countries.
If you are resident in more than one country it is likely that your tax affairs are complex. The way DTAs affect you will depend upon your individual circumstances and the terms of the relevant DTA.
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DTAs also provide details of other things which can affect your liability to UK tax, such as whether or not you are able to claim personal tax allowances, and for what types of income and at what rate you will receive relief from tax.
To obtain relief from UK tax under the terms of a DTA it will be necessary for you to make a claim under the relevant DTA.
A table showing the countries with which the UK has a DTA in force can be seen at paragraph 9.3. This table is correct as at April 2010 and does not show the individual content of each DTA, simply the fact than an agreement exists.
9.1. Non-UK residents
If you are a resident of a country with which the UK has a DTA and not resident in the UK, you may be able to claim exemption or partial relief from UK tax on certain types of income from UK sources. You may also be able to claim exemption from Capital Gains Tax on the disposal of assets.
You can find the precise conditions of exemption or relief in the relevant DTA. It is not possible to give full details here as they vary from DTA to DTA.
9.1.2. Income which can receive relief under a DTA
Normally, you will receive some relief from UK tax on the following sources of income under a DTA.
- • Pensions and some annuities (other than UK Government pensions – see 9.1.3).
- • Royalties.
- • Dividends – see 9.1.9.
- • Interest.
Some agreements state that you must be:
- • subject to tax in the other country in question, or
- • the beneficial owner of the income in the other country in question before you get relief from UK tax.
9.1.3. UK Government pensions
If you receive a pension paid by the UK for service to the UK Government or to a local authority in the UK, it will usually be taxed only by the UK.
9.1.4. Relief under a DTA when carrying on a trade or business
If you are carrying on a trade or running a business through a permanent establishment in the UK, you may not qualify for relief from UK tax on royalties, interest or dividends connected with the permanent establishment. DTAs will often define what is included in permanent establishment.
9.1.5. Earnings from employment and professional services
The guidance in this section will not apply if you are an entertainer, sportsman or sportswoman. Different rules apply to people in those categories – see 9.1.8.
If you are not resident in the UK, and you are not an entertainer, sportsman or sportswoman, you may be able to claim exemption from UK tax under most DTAs on:
- • earnings from an employment in the UK, and
- • profits or earnings for independent, personal or professional services carried out in the UK.
- Usually there are conditions to be met before relief is given under a DTA. These are:
- • for employments
- you must not be in the UK for more than 183 days in the period specified in the DTA (often twelve months), and
- your remuneration must be paid by (or on behalf of) an employer who is not resident in the UK, and it must not be borne by a UK branch of your employer
- • for independent, personal or professional services
- you must not operate from a fixed base in the UK (or, in the case of some DTAs, spend more than a specified number of days in the UK).
9.1.6. Teachers and researchers
Under many DTAs, if you are a teacher or professor who comes to the UK to teach in a school, college, university or other educational establishment for a period of two years or less, you are exempt from UK tax on your earnings from the teaching post. Temporary absences from the UK during this period normally count as part of the two years.
Some agreements cover persons who engage in research. Where this is so, the rules are normally the same as for teachers.
If you stay for more than two years then under most of these DTAs you cannot claim the exemption and you will be liable to tax on the whole of your earnings from the date you arrived. Some DTAs allow exemption to be given only if the earnings are liable to tax in your home country. If you have already received exemption for a visit (or visits) of up to two years, some DTAs will not allow you to claim the exemption again if you make a further visit at a later date.
9.1.7. Students and apprentices
Under most DTAs, if you are an overseas student or apprentice visiting the UK solely for full-time education or training, you will not pay tax on payments from sources outside the UK for your maintenance, education or training.
A number of DTAs also provide that students or apprentices visiting this country will be exempt from UK tax on certain earnings from employment here. Individual DTAs impose various restrictions on this relief, including monetary limits and conditions as to the type of employment.
9.1.8. Entertainers, sportsmen and sportswomen
Under most DTAs, if you are not resident in the UK any payments you receive directly or indirectly connected to performances in the UK will be liable to UK tax. This includes actors and musicians performing on stage or screen, and those participating in all kinds of sports.
The exemption described in 9.1.5 does not apply to entertainers, sportsmen and sportswomen.
UK residents are entitled to a tax credit when they receive a dividend from a company resident in the UK. We charge Income Tax on the total of the dividend and the tax credit. The tax credit is available to reduce their tax liability.
If you are not resident in the UK, you will not receive payment in respect of a tax credit when you receive a dividend from a UK company.
From 6 April 1999, those DTAs that still provide for payment of a tax credit on dividends paid by UK companies continue to give a right to claim a tax credit in excess of the amount which the UK is entitled to retain. Because the rate of tax credit was reduced from 6 April 1999 from 20% to 10%, the amount which the UK is entitled to retain under those agreements will, in practice, cover the whole of the tax credit. So if you make a claim under such a DTA, where a dividend has been paid on or after 6 April 1999, there will be no balance of tax credit left for us to pay to you.
You may also have the right to a tax credit if you receive UK personal tax allowances and reliefs through a claim under a DTA – see 6.6. But if you can only claim these allowances because of the terms of a DTA, whether or not you are entitled to the tax credit will also depend on the terms of the agreement.
9.1.10. Capital gains
Under many DTAs, if you are a resident of another country, you may be liable to tax only in that country on any gains you make from disposing of some types of assets. In that case, you will be exempt from Capital Gains Tax in the UK even if you are ordinarily resident here. But if you are resident in another country on a temporary basis, and then return to be resident in the UK, you may be charged Capital Gains Tax on disposals you made when you were not UK resident and not ordinarily resident.
But if you are carrying on a trade or running a business through a permanent establishment in the UK, any gains that you make from disposing of assets connected with the permanent establishment will continue to be chargeable to Capital Gains Tax in the UK.
9.2. UK residents
If you are resident in the UK and have foreign income or gains which are taxable in the country in which they arise or accrue, you may qualify for relief against UK tax on those income or gains for all or part of the foreign tax that you have paid. Even if there is no DTA between the UK and the other country concerned, you may still be entitled to relief under special provisions in the UK’s tax legislation.
9.3. The UK’s DTAs
These are the countries with which the UK has a DTA in force covering taxes on income and/or capital gains. The list does not include limited agreements which are concerned solely with air transport and shipping.
The list is complete as at April 2010.
9.4. Dual residence
You can be regarded as a resident of more than one country (‘dual resident’).
Helpsheet 302 Dual Residents explains how most DTAs resolve the question of dual residence and how liability to UK tax can be affected by the outcome. Since not all DTAs are the same, it is essential when considering whether any relief from UK tax may be due, to look at the text of the particular agreement concerned, as they vary from agreement to agreement.
9.4.1. Residence for the purposes of a Double Taxation Agreement – consequences for tax liability
The residence part of most modern DTAs provides ‘tiebreaker’ rules for determining in which of the two countries an individual who is dual resident under the respective domestic laws should be treated as resident for the purposes of the Agreement. The most commonly found tiebreaker tests are:
- • permanent home
- • centre of vital interests
- • habitual abode
- • nationality.
If all these tests prove inconclusive DTAs normally provide for the tax authorities of the two countries to settle the matter by negotiation. In practice, very few claims reach this stage. If the tiebreaker rules award residence for the purposes of the DTA to the other country, UK tax liability is usually affected.
If the tiebreaker rules award residence for the purpose of the DTA to the UK, you will remain liable to UK tax as a UK resident. You may, however, be entitled to relief from tax in the other country as a resident of the UK for the purposes of the DTA.