DOUBLE TAXATION RELIEF FOR INDIVIDUALS

 

1. GENERAL PRINCIPLES

Different countries have their own domestic tax laws, just because an individual pays tax in one country on a particular source of income, does not automatically mean that they will not pay tax on that same income in another — this concept is known as ‘double taxation.

Generally, the UK, in common with most other countries, will seek to tax an individual’s income where either:

• The source of the income is within the UK, or
• The individual is resident in the

As such, in normal circumstances, an individual who is resident in the UK for tax purposes would be charged to tax not only on their UK income but also on any income arising elsewhere in the world. It follows therefore that certain sources of income may fall to be taxed in more than one country.

A common example of this would be income arising on investments that a UK resident has made in another country, such as rental income from a property situated outside the UK, or interest from an overseas bank account.

In these circumstances, there are several mechanisms that may apply to eliminate this double tax either in whole or in part. They can be summarised as:

• Relief under a double taxation agreement,
• Unilateral relief,
• Relief by deduction

Which will be applicable to a UK resident individual, will depend on the source of income and where it arises.

2. DOUBLE TAX AGREEMENTS

The UK has entered into double tax agreements (DTAs) with numerous countries to avoid or reduce the level of double taxation. These agreements include a series of articles detailing the taxes covered and how relief is to be given for a particular source of income.

For UK tax purposes, TIOPA 2010, s. 6 provides that once an Order in Council has been made declaring that an arrangement with territory outside the UK should take effect, the terms of that double tax treaty override domestic law. As such, the terms of a DTA should be the first stop when considering relief for double taxation.

Generally, a DTA will provide for relief to be given either by:

• an exemption in one country, so that the other has exclusive taxing rights for a particular source of income, or
• for one country to have primary taxing rights and for the other to reduce its tax charge by giving credit for the tax charged by the first

Primary taxing rights are determined by the residence of the taxpayer. Should a person be considered a resident of both countries under their domestic law, provisions (known as a ‘tie-breaker’ clause) are included to determine residence for the purposes of the agreement.

A list of UK double tax agreements in force can be found on HMRC’s website. Whilst most agreements follow a similar model, they do differ and can be complex. It is important to check the agreement with the specific country in question to ensure double tax relief is claimed correctly.

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