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What is double taxation?

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Last editedFeb 20222 min read

Is it possible to be taxed more than once on the same income? In some cases, it is. When this happens, it’s referred to as double taxation. Keep reading to find out how this works, and what type of double taxation relief is available.

Understanding double taxation

Double taxation refers to the concept of paying income tax twice on the same income source. There are a few situations when double taxation might arise.

Income derived from international investments or trades might be taxed separately in more than one country. Individuals with dual citizenship might also be required to pay personal income taxes in more than one country, if there is no double taxation treaty in place.
Capital gains tax is another example of double taxation. Income might be taxed twice, once at the personal level and once at the corporate level. This is because corporations are considered to be separate entities from shareholders. A corporation must pay tax on its annual earnings. When dividends are paid out to shareholders, they will also need to pay capital gains tax on these same earnings at the personal level.
Estate taxes provide a third example of double taxation. An individual’s income is taxed the first time. When that income is transferred to heirs, the same income is taxed again.

Fortunately, most countries strive to prevent double taxation through the use of tax credits or rates. For example, according to the UK tax code you tax the receipt of certain incomes while allowing deductions for offsetting payments. This applies to income sources like the following:

Business interest expenses
Home mortgage interest
Payroll expenses
Cost of goods sold

There is also a double taxation agreement in the UK to prevent businesses from paying income tax in more than one country.

Understanding the double taxation agreement UK

Like many countries, the UK offers a double taxation treaty. This helps prevent non-resident citizens working abroad from paying income tax in both their home countries and the countries where this income is earned. Dual residents are responsible for paying, declaring, or offsetting this income tax as needed, according to the agreement.

It’s also possible to claim tax relief in some cases under the double taxation agreement, dependent on the country involved. However, when two different countries have different tax rates, it can become complicated. Usually, the worker wouldn’t be liable for more than the higher maximum tax rate out of the two countries. Similarly, UK residents working abroad should determine in which country they qualify as a ‘treaty resident’ for tax purposes.

Benefits of the double taxation treaty

For international businesses, a double taxation treaty helps reduce additional tax burdens. Without this type of treaty in place, income could be taxed both in the country of earnings as well as after it’s been repatriated to the home country. Without a double taxation agreement, international transactions would also potentially be unviable. As a result, most countries have signed treaties to prevent double taxation and streamline taxable trade.

Disadvantages of the double taxation treaty

While overall a double taxation agreement helps encourage trade without the unfair burden of paying taxes in more than one county, there is some criticism. Some opponents of double taxation relief treaties argue that it’s fair to apply taxes to dividends. Without these capital gains taxes in place, wealthy investors could simply live off of tax-free dividends without contributing to the system. As a result, stock ownership would effectively become a tax haven or shelter.

In the case of international workers or dual-country residents, double taxation agreements can often be complicated. Income must be reported in both the home country and country of residence, in some cases, and all countries have their own treaties. For example, US expats in the UK must still file taxes in both countries despite the double taxation agreement in the UK. This is why it’s always important to keep accurate records, particularly for international tax returns.

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