The UK Double Taxation Treaties

Treaties in general

Most countries enter into double taxation treaties with other countries in order to facilitate the exchange of information and to prevent the double taxation of income on its residents who may have connections and income form the other country or in fact be resident in both countries.  Most treaties are based on OECD convention.

The UK and Russia

The UK and Russia are no exception and a convention on taxation was signed by Douglas Hurd and Andrei Kozyrev in 1994.  The treaty is complex and needs to be consulted to determine where each source of income is taxed and in fact some sources such as dividends and interest could be taxed in both countries, with relief given for tax paid in one country given in the other.  The treaty broadly follows the OECD convention, as do most treaties; however, there are some clauses specific to this treaty.

The treaty covers UK income tax and capital gains tax in respect of individuals and Corporation tax in respect of companies, and like a lot of treaties it does not cover Inheritance tax at all.  The treaty is very legally worded document and is difficult to digest but it does cover most points that will arise in the taxation affairs of a resident of either country who has income or gains arising in the other.

Some examples of income covered by the treaty: 

Income from employment is only taxed in one country, being the country where the employee is resident, the only exception to this is where the employee is resident in one country and carries out most of his duties in the other country.

Business profits are only taxable in on country, being the country where the business has a permanent establishment.  If, however a company is based in the UK also has a permanent establishment in Russia, Russia may tax the profits of the company as well, but only to the extent that arise from the permanent establishment in Russia.  The definition of a permanent establishment is laid down in the treaty and runs to two pages.

Dividends paid form a company in one country to a resident of the other country are eligible to be taxed in both countries.  This is achieved by the company or institution paying the dividend deducting a withholding tax from the gross payment, under the OECD guidelines this should not exceed 15%.  The recipient is then taxable in the country of their residence and is given credit for the withholding tax against their total liability on the dividend.

Interest is treated in pretty much the same way as dividends; however, the withholding tax is normally capped at 10%.

Capital gains are another complex area, and it will depend on the type of asset disposed of as to how it is dealt with by the treaty.  Broadly gains on immovable property arising to a resident of one country that when the asset is situated in the other country will be taxed in the country where the asset is located.  Alternatively gains arising on non-immovable property are taxable in the country where the individual is resident.

The UK and China

The Double Taxation Agreement (DTA) between the UK and China was originally signed in London in June 2011 and became effective from 2014.  This comprehensive treaty is yet further evidence of the UK government’s clear ambition to forge stronger business links with China.

DTA covers income tax and capital gains tax in respect of individuals and Corporation tax (the enterprise income tax in China) in respect of companies, and like The UK and Russia treaty, it does not cover Inheritance tax. 

Some examples of income covered by DTA: 

Income from employment is only taxed in one country, being the country where the employee is resident, the only exception to this is where the employee is resident in one country and carries out most of his duties in the other country.

Business profits are only taxable in one country, being the country where the business has a permanent establishment.  If, however a company is based in the UK also has a permanent establishment in China, China may tax the profits of the company as well, but only to the extent that arise from the permanent establishment in China. 

Dividends paid form a company in one country to a resident of the other country are eligible to be taxed in both countries. The withholding tax from the gross dividend payment should not exceed 15%. The recipient is then taxable in the country of their residence and the credit for the withholding tax is given against their total liability on the dividend.

The withholding tax for Interest is capped at 10%.  

Capital gains will depend on the type of asset disposed of as to how it is dealt with by the treaty.  Broadly gains on immovable property arising to a resident of one country that when the asset is situated in the other country will be taxed in the country where the asset is located.  Alternatively gains arising on non-immovable property are taxable in the country where the individual is resident; this would apply to gains arising on shares for example.

The above is just a very brief look at the treaties and illustrates that the area is complex, and advice should always be sought before any transaction is undertaken.

Services we offer

We are pleased to be able to offer the following taxation-based services: 

• A General tax consultation and/or specific tax advice;

• Tax planning for your general situation or for a specific transaction;

• Registration for National Insurance and Unique Tax Reference numbers;

• Preparation and submission of annual self-assessment returns;

• Preparation and submission of return for overseas landlords;

• Formation of UK and offshore companies in respect to an acquisition of the commercial property and administrative and accounting services for corporate entities.

All taxation services are arranged on a fixed fee basis with the fee to be charged agreed in advance of any work being undertaken.

For all questions regarding your business in the UK and tax planning, please contact our Business Consultancy team at Law Firm Limited on +44 (0)20 7907 1460 or via email