Double Taxation Agreements for overseas company formation
December 9, 2016
All people who are engaged in the abroad activity can be put at risk of double taxation. For example, if you are working overseas in the UK, you may pay the first tax to the UK tax authorities and the second tax in the country where you have a residence.
So, before starting off to work abroad on a contract, be convinced that the country of your residence has a Double Taxation Agreement with the country where you are going to work. If the country doesn’t have a Double Taxation Agreement, you should try to get a tax certificate. This certificate defines taxes that you have to pay in case of working abroad. If you won’t worry about it, your income will be taxed twice.
A Double Taxation Agreement
What is a Double Taxation Agreement? It is a treaty between two countries which seek to avoid double taxation. It means that countries accept reasonable taxation terms, therefore, a potential taxpayer pays taxes once, and not twice. Each modern country has a wide range of Double Taxation Agreements. Only the UK has signed over 100 Double Taxation Agreements with different countries.
Individual foreign tax credit relief
If you set up a company in the country with a Double Taxation Agreement, you are qualified for a tax relief. There are a lot of ways to get a relief and it depends on your residence country and where your income is taxed. The residents of the UK often get a Foreign Tax Credit Relief in a form of UK tax return, after reporting an overseas income. Then, by means of a Double Taxation Agreement, tax authorities determine the amount of a tax you will get back.
A financial residence
In case of a double taxation, a financial residence is the country where you are a resident. It will provide you a taxation relief for formation of companies (tax abroad credit or some exceptions for abroad income). So, the tax paid in the foreign country is the final tax on your foreign income.
Keep in mind that a financial residence provides a taxation relief for taxes paid in your residence country. If the amount of tax in other country is higher, financial residence doesn’t cover the excess over the amount of tax. Besides, you have to prove that you paid foreign taxes.
How does it work in the UK?
Companies which conduct activity in the UK, or plan to do it, need to be a tax resident in the UK to get benefits from UK Double Taxation Agreements. But what to do if a company isn’t a resident of the UK? Appoint professional UK directors! It will help to establish a basis and to get a tax residence in the UK for covering double taxation.
How do UK directors help foreign companies? By managing and controlling companies from the UK. Usually Double Taxation Agreements contain conditions about place of effective management and non-UK directors can move the company to find the best place for taxation goals.
Often companies need to obtain tax residency certificates from HMRC to provide these documents to other tax authorities. To do it correctly the best way to choose a good corporate off shore service provider that can support you in the international taxation.