In today's global business environment, it’s never been easier for you, or your employees to work from anywhere across the globe. Whether it’s working as a digital nomad yourself or hiring the best talent from other countries, multi-jurisdiction brings additional consideration when it comes to managing and optimising your tax burden.
Whenever an individual is resident somewhere but works elsewhere, or for a firm in a different country, authorities in all relevant jurisdictions want to ensure they get their due portion of the tax due. One of the core mechanisms for determining tax obligations between countries is the double tax treaty, but the specific rules and timings involved in managing tax through these treaties are highly variable depending on the countries in question.
Earners (and those with passive income, such as rental or investment income) should not make the mistake of thinking that merely because such a treaty exists, that they can skip tax with impunity in either their country of origin or residence. Here, Haines Watts Tax Advisor Nicola Goldsmith explains what business owners need to know about double tax treaties and how the right advisor can help you navigate the murky waters of international tax.
What is a Double Tax Treaty?
A double tax treaty (DTT) is a formal agreement between two countries designed to ensure you don't pay tax twice on the same income or gain. These treaties are essential for businesses operating internationally and individuals with income in another country as they:
- Clarify tax residency: If you happen to meet the residency rules of more than one country, the DTT acts as the deciding factor.
- Define where different types of income are taxed: Some types of income might be taxed in both countries, while others are only taxed in one.
- Prevent double taxation: The two countries agree how any tax is dealt with where both countries reserve the right to tax the income or gain.
- Provide a framework for tax cooperation: This helps to resolve any conflicts that might arise.
The UK has a network of over 200 double tax treaties in place, so if you're doing business internationally, there's likely to be a relevant treaty to consider.
Factors that influence international taxation policy
For individuals and businesses earning across borders, the details of tax policy will vary greatly depending on timing, income, asset type and treaty in question.
If you or your employees are planning to move abroad, tax considerations must be at the forefront. Seek professional advice to figure out the potential tax implications for both individuals and your business.
Income Sources
Every type of income is taxed differently depending on the DTT involved. This includes:
- Pensions: Tax treatment can vary widely depending on the type of pension (government vs. private) and the specific double tax treaty. It's common for either the country of residence or the country where the pension was earned to have taxing rights rather than both countries, but this is not always the case and it can vary by type of pension in the same treaty.
- Investments: Dividends, interest, and capital gains are often taxed in the country where the investment is located. Double tax treaties might reduce withholding taxes on investment income, and some (but not all) capital gains are typically taxed by the seller's country of residence.
- Rental Income: Rental income is usually taxed in the country where the property is located and the country of residence. You might be able to claim a foreign tax credit or exemption in your home country to avoid double taxation on this income, but each country will apply its own rules to calculate the income, so the amount of the taxable income may differ between countries, let alone the amount of the tax due!
Asset type
If you’re moving between jurisdictions and holding assets in your country of origin, the timing of your disposal of these assets will affect where and how much tax you pay. Depending on when you sell, the proceeds may be taxable at home or abroad (or both!), which can significantly impact capital gained from large assets such as a house.
Timing
It can be easier to become liable for overseas tax than it is to stop paying tax in your home country. The UK generally taxes its residents on their worldwide income. If you plan to be outside of the UK for less than a complete tax year, then you will usually remain UK tax resident, but this can depend on the treaty and when you are out. However, it generally only takes over six months to risk becoming a tax resident in another country (and sometimes less), meaning that in the absence of a double tax agreement, you will have to manage tax in both places.
Similarly, every time you visit your country of origin, this counts towards your residency status. In cases where you may have family or long-term obligations in your origin country, or have retained a property, or work there, this can add up to a residency-qualifying period.
Employment
Cross-border employment can become very complex, where your business might need to operate PAYE in multiple countries and also manage social security contributions.
One of the key issues for employers is also to what extent an employee working abroad could mean that the business becomes liable to corporation tax (or a foreign equivalent) in that country. This comes down to whether the activity amounts to a ‘permanent establishment’.
This also applies to business owners travelling abroad to generate local business. Even if the situation is as simple as a home office set up in a foreign country, revenue attributable to that office could be subject to tax in that locality.
Despite its popularity as an alternative asset class among travellers, gains on cryptocurrency sales are not immune to traditional tax policy, and are likely subject to Capital Gains Tax (CGT). Since it's not viewed as traditional trading income, you are also likely to not be able to offset losses against other sources of income. Given the potential level of any gains, any country with which you have connections may be interested in these!
Clarifying DTTs with Haines Watts
For businesses and individuals managing multiple income streams, double tax treaties are an essential tool for managing tax – however, they remain complex to understand and implement, given the need to factor in the specific domestic tax laws of each country involved, and how the DTT affects both of them.
At Haines Watts, our tax specialists have built up a deep experience with managing complex tax cases, and can help you:
- Understand the relevant DTT(s).
- Navigate how it interacts with UK tax laws.
- Develop a tax-efficient strategy for your business and employees.
To find out more and connect with one of our experts, get in touch today.
