Double tax agreements (DTA’s)

 

Overview

 

Understanding tax obligations is crucial, particularly if you are both domiciled and resident in the UK. In such cases, you’re liable for taxes on worldwide income earned in the relevant tax year. For instance, if you reside in the UK and have rental property in Spain, you must declare the foreign rental income on your UK tax return and pay tax on the profits. However, if you’re not domiciled in the UK, you may be eligible to claim the Remittance Basis if you don’t bring the overseas income into the UK.

 

But why do I have to pay tax twice if I’m already taxed in Spain?

 

An essential consideration. Unless income is exempted by a Double Tax Agreement (DTA), the country where income arises has the right to tax it. If income isn’t exempted by a DTA, it’s assessed in the UK, and relief from double taxation can be claimed. This relief, known as Foreign Tax Credit relief, requires UK residency to claim. Alternatively, foreign tax paid can be claimed as an expense. Typically, income from property is taxable both in the country where it arises and where the taxpayer resides.

 

Example

 

To illustrate, Foreign Tax Credit can often be claimed as the lower of:

  • The foreign tax paid on the income
  • The UK tax due on the foreign income

Suppose Joe lets out a property in Spain, with gross income of £15,000 and expenses of £3,000, resulting in net income of £12,000. Joe pays Spanish tax of £2,280 on the profits. As a UK resident and 40% taxpayer, Joe must declare this income on his UK tax return. However, he can claim Foreign Tax Credit Relief to avoid double taxation.

Joe’s UK tax on rental profits is £4,800 (40% of £12,000). Since the tax already paid in Spain is lower (£2,280), he can claim this as a tax credit. Thus, the tax due on his Spanish rental income in the UK is £4,800 minus £2,280, equalling £2,520.

 

Further Applications of DTA

 

As mentioned, UK residents are liable for tax on worldwide income. Non-UK residents with UK income are subject to UK tax unless exempted under relevant DTA terms. While most tax treaties share similarities, differences exist depending on the country. Some treaties exempt pensions, but certain government pensions may still be taxable in the UK under specific treaties.

DTAs can be complex. We recommend consulting our accounts team and seeking advice from an advisor in your country of residence or income receipt.

 

Territories With DTAs

 

Below is a list of territories with DTAs with the UK. Note that each agreement’s contents and terms may vary:

 

Albania Cyprus Israel Mongolia Slovenia
Algeria Czech Republic Italy Montenegro Solomon Islands
Antigua & Barbuda Denmark Ivory Coast Montserrat Spain
Argentina Egypt Jamaica Morocco Sri Lanka
Armenia Estonia Japan Namibia Sudan
Australia Ethiopia Jersey Netherlands Swaziland
Austria Falkland Islands Jordan New Zealand Sweden
Azerbaijan Faroes Kazakhstan Nigeria Switzerland
Bahrain Fiji Kenya Norway Taiwan
Bangladesh Finland Kiribati Oman Tajikistan
Barbados France Korea Pakistan Thailand
Belarus Gambia Kosovo Panama Trinidad and Tobago
Belgium Georgia Kuwait Papua New Guinea Tunisia
Belize Germany Latvia Philippines Turkey
Bolivia Ghana Lesotho Poland Turkmenistan
Bosnia-Herzegovina Greece Libya Portugal Tuvalu
Botswana Grenada Liechtenstein Qatar UAE
British Virgin Islands Guernsey Lithuania Romania Uganda
Brunei Guyana Luxembourg Russia Ukraine
Bulgaria Hong Kong Macedonia Saint Christopher Uruguay
Burma Hungary Malawi Saudi Arabia USA
Canada Iceland Malaysia Senegal Uzbekistan
Cayman Islands India Malta Serbia Venezuela
Chile Indonesia Mauritius Sierra Leone Vietnam
China Ireland Mexico Singapore Zambia
Croatia Isle of Man Moldova Slovak Republic Zimbabwe

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