Both individuals and companies can use double taxation agreements and treaties to reduce their taxes. However, they are only applicable when there is an international element to the situation.
Before writing anything else, it is very important to highlight that the double tax arena is very complex and specific personalised advice should be obtained before taking any implementation steps. Your situation and the countries involved may be unique and so any advice must be tailored to your exact situation.
Why Do Double Taxation Agreements Exist?
The accepted answer and the real answer to this will be different from each other.
Firstly, to the accepted answer. Every country has it’s own set of unique rules to tax personal and corporate income. Those rules have developed over many decades and are designed to ensure that each nation state can raise enough revenue to function.
However, some companies and individuals have business and financial interests in more than one country. Double tax treaties exist to ensure that they pay the appropriate level of tax in the correct location and are not made to pay taxes on the same revenue sources in more than one country.
The real reason that double tax treaties exist is because large corporations and wealthy individuals lobbied for them. Let’s be clear, most governments are not interested in whether or not we pay the correct amount of tax to the right country, they are concerned that we pay to them.
Without the lobbying pressure of wealthy groups, we would probably all owe all our money to every government forever!
How Double Tax Treaties Work
For the lay person, it is easier to think about the result of these treaties. Therefore, from here onwards, please think of them as double no taxation treaties, because that is how most major corporations and the 1% actually use them.
If you have read anything in the news between 2012 and 2015 about major technology corporations – such as Apple, Google and Facebook – it will have been difficult to have missed information about their taxes.
These are companies that generate tens of billions in revenues around the world but have structured their finances to legally minimise their tax bills.
Please note the use of the word legally, it is very important.
There are a wide range of terms that are used by the press for these deals, “sweetheart deals”, “a double Irish”, “a Dutch sandwich” and more. The result is a complex structure that moves revenue from one location to another to ensure that it ultimately is received free of most or all taxation. For this reasons, there are lots of financial services jobs available in smaller jurisdictions where it is difficult to recruit great staff.
Just as there are jurisdictions and formations used by companies, there exists a similar range that is used by private individuals. These include trusts for wealth planning, banking havens, asset allocation havens, low or no tax personal residency jurisdictions and on and on. The global super rich play with regulatory arbitrage just as international businesses and hedge funds do.
The reality is that a second citizenship would be a very small part of this concept, but it is a part of this concept, which is why I am writing about it for you.
Double Taxation Agreement Countries
The modern globalised world means that most countries have agreements with most other countries. Not all agreements will cover all laws, this all comes down to negotiation between the nations, but they will have some agreements.
The few countries that will be hard to find agreements to will be those that can be guessed – nation states that are outside of the global community or have failed in some way. Therefore, countries such as North Korea, Iran, Yemen, Somalia will likely have none. Then there will be other nations that will have a few because of their relationships with the US, such as Iraq and Afghanistan, but they are also undeveloped in this area.
At the other end of the spectrum, most fully developed nations will have a wide range of agreements with dozens of other countries. A good example is the European Union. At the time of writing, the EU has 28 member states, which means that there are lots of agreements in place. Many of these agreements are with each other, but when countries negotiate with the EU as a block, they will put deals in place with most or all of the countries. Therefore, it will be quite common for even very small European Union members to have reached agreement with more than 100 countries.
For an example, this page lists the countries that the United Kingdom has tax treaties with. From Albania to Zimbabwe, it is not easy to think of a country that is not on the list.
Double Taxation Agreement For Pensions
For people at the end of their working career that have achieved some level of financial independence, how their pension is taxed is very important. Yes, many countries do have agreements that stop their pensions from being taxed twice.
There are many individuals that retire to another country to reduce the level of taxes applied to their pension income. If the new country has a lower average cost of living, this can be a double win for the retiree (their pension is taxed left and the remaining income buys more goods and services than it would do at home).
What To Think About
When planning your move to a new residence or citizenship jurisdiction, it is important to investigate how the type of income that you generate is taxed and at what rates. It might prove that the location you are investigating is a good fit, but it might not be.
Therefore, there is a great deal of value to be had in assessing this situation closely and designing your new legal circumstances to fit in with your existing income and wealth situation.