Double tax agreements – what are they and how do they affect expats?

Posted on: 4th June 2024 in Financial Planning

Key points

• Double tax agreements prevent you from being taxed twice on the same income.
• The UK has the world’s largest network of double tax agreements.
• Double tax agreements provide several benefits for expats.

Like it or not, paying taxes is inevitable. Paying double the tax is not.

Double taxation agreements protect you from just that; paying double the tax on a source of income.

This article is all about double tax agreements. We will look at what they are, how they work and the benefits they provide for expats.

What is a double tax agreement?

Double tax agreements, also known as double tax treaties, or DTAs for short, are agreements in place between two countries.

As the name suggests, one of their key functions is to help people avoid being taxed twice on the same income. They also protect against attempts to avoid or evade tax.

DTAs cover various types of income, such as:

• Income from employment
• Business profits
• Investment income, including dividends and interest
• Capital gains
• Pensions and other types of retirement income

How does a double tax treaty work?

All double tax treaties are different. However, their primary purpose is to define which country has taxing rights. For UK double tax agreements, this means establishing your tax residency status.

Your domicile status and the statutory residence test (SRT) are considered to determine UK tax residency.

For those with dual residency, meaning they are registered in two countries for tax purposes, a ‘tie-breaker test’ determines which country has taxing rights.

Once this is established, an individual may claim tax relief from HMRC or the tax authority for their country of residence. This relief is typically in the form of tax credit or exemption.

Be aware that from April 2025, your domicile status and how it applies to UK tax liability will change. It will be replaced by a new system based on tax residence. 

What countries does the UK have double tax agreements with?

Most countries have double tax agreements. In fact, there are over 3,000 DTAs globally, and the UK has agreements with roughly 120 countries, making it the largest network of treaties of any country.

Some of the countries the UK has agreements in place with are:

• The USA
• Switzerland
• Hong Kong
• Malaysia
• Thailand
• The United Arab Emirates (UAE)

Most DTAs are based on the Organisation for Economic Co-operation and Development (OECD) Model Taxation Convention. However, some countries, such as the USA, have a separate standard form and do not use the OECD model.

Visit the government website for a complete list of UK tax treaties and details on each.

Why double tax treaties matter for expats

Numerous circumstances can trigger double taxation. The two main culprits are:

1. If you are a resident of a country that taxes worldwide income and have income from another country.
2. You are classed as a resident in two countries.

Expats often fall into one of these two categories. Therefore, understanding DTAs is essential to avoid paying more tax than necessary or not paying tax in the right place.

It’s important to note that each double tax agreement is different. As an expat, you need to know if a DTA exists; if one does, you should know its terms or rules.

How do expats benefit from double tax agreements?

Besides paying double tax, DTAs provide two additional benefits for expats:

Clear tax treatment

Tax laws can be complicated at the best of times. However, they become even more challenging when dealing with cross-border tax laws.

Double taxation agreements clearly state which country has taxing rights on a specific income. This lets expats know where their income will be taxed and how much is due.

Reduced tax rates and exemptions

Depending on the location, tax treaties often provide reduced tax rates and exemptions on certain types of income.

For example, let’s say an expat is working in the UAE or another low-tax jurisdiction. If that jurisdiction’s tax laws apply to income earned there, it could result in substantial tax savings.

Optimise your tax planning strategy

While double tax agreements protect expats and provide several benefits, they can be complex. It is recommended that you seek expert advice to ensure you are as tax-efficient as possible.

Holborn Assets is a leading wealth management and financial services provider.

We specialise in the expat market, meaning our team is fully equipped to handle cross-border tax implications and other financial challenges that come with working abroad.

Speak to us today and find out how we can help you.