Double Taxation Treaties

Double Taxation Treaties (‘DTTs’) are conventions between two countries that aim to eliminate the double taxation of income or gains arising in one territory and paid to residents of the other.

They work by dividing the tax rights which each country claims under its domestic laws over the same income and gains. The UK is party to more than 100 DTTs.

Despite attempts at harmonisation, very few DTTs are identical. However, they commonly include some or all of the following provisions:

  • they define which taxes are covered and who is a resident and therefore eligible for benefits
  • they reduce the amounts of tax withheld from interest, dividends, and royalties paid by a resident of one country to a resident of the other country
  • they limit the tax imposed by one country on the business income of a resident of the other country to that on the income from a permanent establishment in the first country
  • they define circumstances in which the income of individuals resident in one country will be taxed in the other country, including salary, self-employment, pension and other income
  • they provide for exemption of certain types of organisations or individuals and
  • they provide procedural frameworks for enforcement and dispute resolution.

The stated goals for entering into a treaty often include reduction of double taxation, eliminating tax evasion and encouraging cross-border trade efficiency.

Certain DTTs have charity-specific provisions but not all. In the case of charitable Common Investment Funds (‘CIFs’), they generally benefit from the extensive tax treaty network developed by the UK and attain the same treaty rights as Open Ended Investment Companies (‘OEICs’) and authorised unit trusts. One notable exception is the US, where dividend income received by a foreign private foundation is subject to a withholding tax rate of 4 per cent as compared to the standard 15 per cent.

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