Anyone who tries to avoid double taxation relief

Double Taxation - Douglas Farmer

Double taxation is the collection of taxes by two or more jurisdictions on the same income (in the case of) income taxes), asset (in the case of capital taxes) or financial transaction (in the case of sales taxes)

There are several ways to reduce double liability. For example, a jurisdiction can:

  • Exempt income from foreign sources from tax,
  • Exempt income from foreign sources from tax if tax has been paid in another jurisdiction or above a benchmark to exclude tax haven jurisdictions, or
  • To fully tax the income from foreign sources, but to give a credit for taxes paid on the income in the foreign jurisdiction.

Jurisdictions may have tax treaties with other countries that have rules to avoid double taxation. These contracts often contain rules for the exchange of information to prevent tax evasion - for example, if a person applies for a tax exemption in one country because they are not resident in that country, but they are not declared as foreign income in the other country; or who claims local tax relief for a foreign tax deduction at source that did not actually take place.

The term "double taxation" can also refer to the double taxation of an income or an activity. For example, corporate profits may be taxed first when they are earned by the company (corporate income tax) and then again when the profits are distributed to shareholders as dividends or other distributions (dividend tax).

There are two types of double taxation: judicial double taxation and economic double taxation. In the first case, when the withholding rule overlaps, the tax is levied by two or more countries in accordance with their national laws in relation to the same transaction. Income arises or applies in their respective jurisdictions. In the latter case, double taxation arises when the same transaction, income or capital is taxed in two or more states but in the hands of another person.

International double taxation treaties

It is not uncommon for a company or a person resident in one country to make a taxable profit (income, profit) in another country. There may be times when a person may have to pay tax on this income locally and also in the country where it was earned. Often stated goals for entering into a contract include reducing double taxation, eliminating tax evasion and promoting the efficiency of cross-border trade. It is widely recognized that tax treaties improve the security of taxpayers and tax authorities in their international business.

A double taxation agreement (DTA) can require that taxes be levied in the country of residence and exempted in the country in which they arise. In other cases, the resident can pay a withholding tax to the country where the income was generated and the taxpayer receives compensation in the country of residence to reflect the fact that the tax has already been paid. In the former case, the taxpayer (abroad) would declare himself non-resident. In both cases, the DTA can provide that the two tax authorities exchange information on such declarations. Because of this communication between countries, they also have a better view of individuals and companies trying to avoid or avoid tax evasion.

Individuals ("natural persons") can only have their residence for tax purposes in one country at a time. Corporate persons who have foreign subsidiaries can have their headquarters in one country and in another country at the same time: A subsidiary can generate significant income in one country, but transfer this income (e.g. as license fees) to a holding company in another country a lower corporate tax rate. Because of this, corporate unreasonable tax avoidance control becomes more difficult and requires further investigation as goods, rights and services are transferred.

Double tax relief

Countries can reduce or avoid double taxation by either providing a tax exemption (EM) for income from foreign sources or by providing a tax credit (FTC) for taxes paid on income from foreign sources.

Under the EM method, the home country must collect the tax on income from foreign sources and transfer it to the country in which it arose. The tax sovereignty only extends to the national border. When countries rely on the territorial principle described above, they usually rely on the EM method to reduce double taxation. However, the EM method is only common for certain income classes or sources, such as international shipping income.

The FTC method is used by countries that (individuals or corporations) tax residents with income, regardless of where they arise. Under the FTC method, the home country must allow a credit on the domestic tax liability if the individual or corporation pays foreign income taxes.

Another solution used is "helping delivery". They create more favorable conditions for multinational corporations to remain based in countries that use less effective measures than the EM or FTC method.

European Union

In the European Union, the member states have signed a multilateral agreement on the exchange of information. This means that they each report (to their colleagues in each other's jurisdiction) a list of people who have applied for local tax exemption because they are not resident in the state in which the income is generated. These people should have reported the foreign income in their country of residence, so any difference is a tax evasion.

suggests. (For a transitional period, some states have a separate agreement. They may offer each non-resident account holder the choice of tax regime: either (a) disclosure of information as above, or (b) deduction of local tax on savings interest at source, as for residents of the Case is).

A 2013 study by Business Europe found that double taxation remains a problem for European multinational companies and an obstacle to cross-border trade and investment. The problematic areas are in particular the restriction of interest deductibility, foreign tax credits, problems with the permanent establishment and different qualifications or interpretations. Germany and Italy were identified as the Member States with the highest number of double taxation cases.


Cyprus has over 45 double taxation treaties and is negotiating with many other countries. Under these agreements, a credit to the tax levied by the country in which the taxpayer is resident is normally allowed for taxes levied in the other contracting country, which results in the taxpayer not exceeding the higher of the pays both tax rates. Some contracts provide an additional tax credit for taxes that would otherwise have been paid had it not been for incentive measures in the other country that resulted in tax exemption or reduction.

Czech Republic - Korea DBA

A DTA was signed between the Czech Republic and Korea in January 2018. The treaty eliminates double taxation between these two countries. In this case, a Korean resident (person or company) who receives dividends from a Czech company must offset the Czech withholding tax on dividends, but also the Czech profit tax, on the profits of the company paying the dividends. The contract regulates the taxation of dividends and interest. According to this contract, dividends paid to the other party are taxed for both legal entities and natural persons at a maximum of 5% of the total amount of the dividend. This contract reduces the limit for the taxation of interest paid from 10% to 5%. Copyrights to literature, works of art, etc. remain tax-free. A maximum tax rate of 10% applies to patents or trademarks.

German tax avoidance

If a foreign citizen stays in Germany for less than 183 days (approx. Six months) and is resident for tax purposes (i.e. and pays tax on his salary and benefits), tax relief may be requested under a specific double taxation treaty. The relevant period of 183 days is either 183 days in a calendar year or a period of 12 months, depending on the contract.

For example, the double taxation treaty with the United Kingdom provides for a period of 183 days in the German tax year (which corresponds to the calendar year). Thus, a British citizen could work in Germany from September 1st until May 31st (9 months) and then claim to be exempt from German tax. Since the double taxation treaties guarantee income protection in some countries,


Various factors such as political and social stability, an educated population, a sophisticated public health and legal system. Above all, corporate taxation makes the Netherlands a very attractive business country. The Netherlands has a corporation tax of 25 percent. Resident taxpayers are taxed on their worldwide income. Non-resident taxpayers are taxed on their income from Dutch sources. There are two types of double taxation relief in the Netherlands. There is economic double taxation relief for income from significant participations in the context of the participation. Legal double tax relief is available for resident taxpayers with foreign sources of income. In both situations there is a combined system that distinguishes active and passive income.


Hungary is unique in that it is the only non-developing country (the other developing country) Since it is Eritrea (flat 2%) which takes into account all residents of its citizenship tax and does not give any personal allowance (like exclusion from foreign earned income in the US), income is taxed from the first penny earned.

While double taxation treaties provide for an exemption from double taxation, there are only 73 of them in Hungary. This means that Hungarian citizens who receive income from around 120 countries and territories with which Hungary has no treaty will be taxed by Hungary, regardless of taxes that have already been paid elsewhere.


India has a comprehensive double taxation treaty with 88 countries, 85 of which have entered into force. This means that agreed tax rates and jurisdictions apply to certain types of income accruing in one country for tax resident in another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide special facilities for taxpayers to protect them from double taxation. Section 90 (bilateral relief) applies to taxpayers who have paid tax to a country with which India has signed double taxation treaties, while Section 91 (unilateral relief) provides benefits to taxpayers who have paid tax to a country with which India pays tax has not signed an agreement. So India relieves both types of taxpayers. The prices differ from country to country.

Example of a benefit of a double taxation avoidance arrangement: Assume that NRI bank deposit interest in India results in a 30 percent withholding tax. Since India has double taxation treaties with several countries, the tax can only be deducted at 10 to 15 percent instead of 30 percent.

In the event of a conflict between the provisions of the Income Tax Act or the Agreement to Avoid Double Taxation, their provisions shall prevail.

A large number of foreign institutional investors trading in Indian stock markets operate out of Singapore, and the second is Mauritius. Under the tax treaty between India and Mauritius, capital gains from the sale of shares are taxable in the shareholder's country of residence and not in the country of residence of the company whose shares were sold. Therefore, a Mauritius-based company that sells shares in an Indian company does not pay taxes in India. As there is no capital gains tax in Mauritius, all profits are not taxed.

The protocol to amend the India-Mauritius Convention, signed on May 10, 2016, provides for withholding tax on capital gains from the sale of shares acquired in an India-based company from April 1, 2017. At the same time, investments made prior to April 1, 2017 have been grandfathered and are not subject to capital gains taxation in India. If such capital gains arise during the transition period from April 1, 2017 to March 31, 2019, the tax rate will be capped at 50% of the India domestic tax rate. However, the benefit of a 50% reduction in the tax rate during the transition period is subject to the article on the limitation of benefits. Taxation in India at the full domestic tax rate will apply from fiscal year 2019-20.

The revised double taxation treaty between India and Cyprus, signed on November 18, 2016, provides for a source-based taxation of capital gains from the sale of shares instead of the residence-based taxation provided under the double taxation treaty that was signed in 1994. For investments before April 1, 2017 however, a grandfathering clause was envisaged for which capital gains will continue to be taxed in the country of the taxpayer's resident. It also provides assistance between the two countries in collecting taxes and updates the information exchange rules to reflect recognized international standards.

The Double Tax Avoidance Agreement between India and Singapore currently provides for residence-based taxation of capital gains on shares in a company. The third protocol changes the agreement with effect from April 1, 2017 to include withholding tax on capital gains from the transfer of shares in a company. This will contain lost revenue, prevent double non-taxation and streamline the flow of investments. In order to provide reassurance to investors, investments in stocks made prior to April 1, 2017 have been treated grandfathered subject to compliance with the terms of the performance limitation clause under the 2005 Protocol. In addition, a two-year transition period from April 1, 2017 to March 31, 2019 was provided, during which capital gains from shares are taxed in the home country at half the normal tax rate, provided the conditions of the performance limitation clause are met.

The Third Protocol also contains provisions to facilitate economic double taxation in transfer pricing cases. This is a tax-friendly measure and is in line with India's obligations under the Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard for providing Mutual Agreement Procedure (MAP) access in transfer pricing cases. The Third Protocol also enables the application of national law and measures to prevent tax avoidance or tax evasion. The $ 5.98 billion investment in Singapore has taken over Mauritius' $ 4.85 billion investment as the largest single investor for 2013-14.


Basically resident in Australia will be taxed on their worldwide income while a non-resident will only be taxed on Australian income. Both parts of the principle can increase taxation in more than one jurisdiction. In order to avoid double taxation of income by different jurisdictions, Australia has entered into double taxation agreements (DTAs) with a number of other countries, in which both countries agree which taxes are paid to which country.

For example, the DTA with the United States states that in the case of royalties, the US tax Australian residents at a 5% tax rate and Australia tax normal Australian tax rates (i.e. 30% for businesses) but give credit for those already paid 5%.For Australian residents, this results in the same liability as if the royalties were earned in Australia while the US keeps the 5% credit.

United States

United States Citizens and Foreign Residents Abroad

In principle, US citizens are subject to tax wherever they reside. However, some measures reduce the resulting double taxation obligation.

First, a person who resides in good faith in a foreign country or has been outside the United States for an extended period of time to the exclusion (exemption) of part or all of earned income (ie, personal service income as distinct from capital or capital income) is eligible. That exemption was $ 103,900 in 2018, prorated. (See IRS Form 2555.)

Second, the United States allows foreign income tax paid to be offset against US income tax liability on foreign income not covered by this exclusion. The foreign tax credit is not allowed for taxes paid on earned income that is excluded (i.e. no double immersion) under the rules described in the previous paragraph.

Double taxation within the United States

Double taxation Taxation can also take place within a single country. This is usually the case when sub-national jurisdictions have tax powers and jurisdictions have competing claims. In the United States, a person can legally have only one place of residence. When a person dies, different states can claim that the person was resident in that state. Intangible personal property can then be taxed by any state that makes a claim. In the absence of specific laws prohibiting multiple taxation and as long as the total amount of taxes does not exceed 100% of the value of tangible personal property, the courts will allow such multiple taxation.

Moreover, since each the state sets its own rules as to who is a tax resident. A person can be subject to the claims of two states on his income. For example, if someone's legal / permanent residence is in State A, which only takes into account the permanent residence to which they are returning to residence, but he or she spends seven months of the year (e.g. April through October) in State B. In which someone stays longer If half a year is considered a resident of a part of the year, this person owes both states taxes on money earned in state B. College or university students may also be subject to claims from more than one state, generally if they leave their original state to go to school, and the second state considers the student to be a tax resident. In some cases, one state grants credit for taxes paid to another state, but not always.

Taxation of corporate dividends

In the United States, the term "double taxation" is sometimes used to refer to the taxation of dividends. This situation arises when corporate profits are deemed to be taxed twice: firstly, when they are earned by the corporation (corporation tax) and again when the profits are distributed to shareholders as a dividend or other distribution (dividend tax).


In recent years, the development of foreign investment by Chinese companies has increased rapidly and has become quite influential. The handling of cross-border tax matters is thus becoming one of China's major financial and trade projects, and the problems of cross-border taxation are still increasing. To solve the problems, multilateral tax treaties are being signed between countries that can provide legal assistance to help businesses on both sides avoid double taxation and solve tax problems. In order to fulfill China's "Going Global" strategy and to help local companies adapt to the globalization situation, China has made efforts to promote and sign multilateral tax treaties with other countries in order to achieve mutual interests. By the end of November 2016, China had officially signed 102 double taxation treaties. 98 of these agreements have already entered into force. In addition, China signed an agreement to avoid double taxation with Hong Kong and Macau, a Special Administrative Region. China also signed a double taxation treaty with Taiwan in August 2015, which has not yet entered into force. According to the Chinese State Tax Administration, the first double taxation treaty was signed with Japan in September 1983. The most recent agreement was signed with Cambodia in October 2016. Regarding the state disruption situation, China would continue the signed agreement after the disruption. For example, in June 1987 China first signed a double taxation agreement with the Czechoslovak Socialist Republic. In 1990, Czechoslovakia was divided into two countries, the Czech Republic and Slovakia, and the original agreement with the Czechoslovak Socialist Republic was continuously applied in two new countries. In August 2009, China signed the new agreement with the Czech Republic. And when it comes to the special case of Germany, China continued to use the agreement with the Federal Republic of Germany after the reunification of two Germans. China has signed double taxation treaties with many countries. Among them, there are not only countries that have made large investments in China but also countries that are recipients of Chinese investments as good relations. In terms of contract volume, China is only next to Great Britain. For those countries that have not signed the double taxation treaties with China, some of them have signed information exchange agreements with China.

Signing the double taxation treaty has four main effects.

1. Eliminate double taxation and lower tax costs for "global" companies.

2. Increase tax security, reduce the risk of cross-border taxation

3. Reduce the tax burden of "globalizing" companies in the host country and improve the competitiveness of these companies.

4. When tax disputes arise, the agreements can provide a two-way consultation mechanism and resolve the existing controversial issues.

Under general conditions, the tax rate under a tax treaty is often lower than the domestic tax rate under host country law. Take Russia as an example. In Russia, the standard withholding tax rate for interest and royalties under national law is 20% each. According to the latest tax treaty that China has signed with Russia, the withholding tax rate is 0 and the withholding tax rate is 6%. Obviously, this can lower corporate tax costs, increase "globalization" propensity and competitiveness of domestic companies, and bring goodness.

See also