What is Double Taxation?

When it comes to taxation, countries have very different legislations and sets of regulations that they use. Businesses as well as individuals are mostly required to pay taxes on their income. Since the world is more connected these days, it is possible to make earnings on a global scale. In these situations, problems of double taxation could easily arise. So, what is double taxation and can you avoid it in the UK?

Meaning of Double Taxation

The most general meaning of double taxation is all about being taxed twice for the same income. For example, in the case of individuals, a person could pay income tax on his or her earnings to a country where they receive the payment from as well as to their resident country. On a corporate level, it means that your business is taxed twice on specific earnings.

But double taxation is also referred to in a different context. For instance, in the US, the term is often used to showcase the situation where corporations pay capital tax, but when individuals receive payments in the form of shares, they are again taxed for this income, for instance.

The rest of this article will focus on only the first meaning of double taxation. This is the most common use of the term and it is the meaning of double taxation in the UK legislation.

How to Avoid Double Taxation?

In order to prevent double taxation, governments sign tax treaties with each other. These treaties guarantee that an individual or business is only taxed on the income once. These double taxation agreements work in different ways. According to the specific agreement, you may:

  • Pay tax in your country of residence while you receive an exemption or relief from the country where you made the income or gain
  • Pay tax in the country where the income was made or gained and then get an exemption or relief to pay tax in your country of residence
  • The tax you pay in the country where you made the income or gain is deducted and you then declare this tax as paid on your tax return to your country of residence. This is often referred to as ‘withholding tax’

The system, which is used in each case, depends on the two countries involved. You can find out more about the tax treaties from the Government’s database. It’s also a good idea to check out websites such as Freelancers in the UK to find out more about how double taxation would work in your case.

What if There Is No Double Tax Treaty?

Naturally, it is possible to make an income or gain in a country that doesn’t have a tax treaty with the UK. In these instances, you are often required to pay income tax in both countries. But if you are a resident in the UK, then it might be possible to get credit for the tax you paid. This is referred to as the ‘unilateral relief’

On the other hand, if you aren’t a resident in the UK you might still be able to claim back some of the tax you paid under the ‘Personal Allowance’. PruAdvisor.co.uk has some tips on personal allowance to assist you.

You don’t need to be scared about having to pay double tax on your income, since the tax treaties are very effective. It might mean that you need to do some extra paperwork, but you can get help with your self-assessment or corporate accounts and deal with double taxation problems.