UK Fact-File Part 3:
Individual Business International Taxation

3.3 UK Double Tax Treaties

Double tax treaties

Double taxation agreements exist to protect against the risk of a person (or company) being taxed twice, where there is liability for tax on the same income in two different countries.

There are thousands of double tax treaties in force throughout the world and the UK has more of these treaties than any other country – 121 treaties were in force as at the beginning of 2010. Many of these treaties will include exemptions for withholding tax – this normally applies to income from interest, dividends, royalties and property rental income. However, the situation varies from country to country.

Where a DTT follows the OECD (Organisation for Economic Cooperation and Development) model, which most – but not all – tax treaties do, the following areas are, inter alia, covered:

* Benefits will only be extended to residents of the contracting states (and in a dual residence situation, there will be rules to determine a single state of residence (which in the case of a corporate entity, will usually be the state in which the effective management of the entity takes place, although sometimes this can be determined under the mutual agreement procedure, where this exists);

* Taxes covered by the DTT will usually be income tax, corporation tax, and capital gains tax (with indirect taxes and inheritance and gift taxes excluded from the scope of the agreement);

* The definition of a permanent establishment for tax residence purposes will be given.

* Income from immovable property will usually be taxable in the state in which said property is located, although the other contracting state may tax the income, as long as double taxation relief is granted.

* The tax treatment of dividends will be outlined, and will usually be that the dividends should be taxed in the country of which the company paying the dividends is a resident, usually at a specified lower rate than would usually apply.

* The rules governing the taxation of interest will be outlined, and will usually be that it should taxed in the contracting state in which it arises, but if the beneficial owner of the interest is a resident of the other state, then the rate will be limited to a specified percentage of the gross interest payment.

* The tax treatment of royalties will be outlined, and will usually be that the taxation in the source State of royalties paid to a resident of the other State will be limited, with the source State retaining the ability to tax royalties that can be attributed to a permanent establishment of the beneficial owner in that State.

* The tax treatment of capital gains will be outlined, and will generally (with certain exceptions, including for gains relating to permanent establishments and gains from international shipping or international air traffic) be that the source state will retain the right to tax gains from “the alienation of immovable property situated in that State”.

* With regard to income from ‘professional services’ (such as those provided by doctors, lawyers, accountants, engineers, etc), the rule will usually be that the source State of such income may only tax it where it is attributable to a fixed base there. This provision is no longer contained in the OECD model treaty, but has been written into the majority of UK treaties.

* With regard to the taxation of income from employment, the rules outlined in the DTT will usually be that payment in respect of employment received by an individual who is a resident of one contracting state may be taxed only in that state, “unless the employment is exercised in the other contracting state”. Individuals employed in international shipping or air traffic are the exception here, and are usually taxed in the state in which the operator of the ship or aircraft is resident.

* In terms of the taxation of directors’ fees, the rules will generally be that contracting states fees paid by companies that are resident in that State for services performed by residents of the other contracting state in their capacity as board members of such companies.

* With regard to the taxation of artists, entertainers and sports-people, who are resident in one of the contracting states and performing services in the other State, it is stated that “income derived by a resident of one State from his or her personal activities as an entertainer or sportsperson exercised in the other State may be taxed in that other State”. Special help is available from HMRC for entertainers and sportspersons who are not UK residents – tax paid in the UK would have to be claimed back from the individual’s home (resident) State. The special HMRC unit for this type of taxpayer (contact details for other types of non-resident taxpayer available here)is:

HMRC Residency
Foreign Entertainers Unit
St. John’s House
Merton Road
Liverpool. L75 1BB. Telephone 0151 472 6488.

This means that neither entertainers nor sportspeople are able to benefit from the 183-day exemption rule. There is also usually an anti-abuse provision, for cases in which a third party (such as a company formed for just such a purpose, and which might otherwise claim exemption from tax because it earns business profits but has no permanent establishment in the host country) receives the income in respect of the activities of the entertainer or sportsperson

* Pensions and annuities arising in one contracting state, and paid with regard to employment to a resident in the other contracting state will usually only be taxable in the latter state.

* With regard to the avoidance of double taxation as a general principle, where both states have taxing rights on income or gains, the State of residence of the taxpayer will usually either exempt the income or gains from further taxation or grant a tax credit for the tax paid in the other State.

* Increasingly, provisions specifying situations in which information on the tax matters will be included in DTTs, (or separate tax information exchange agreements TIEAs will be put in place), although this is not always the case.