Double taxation agreements and employment taxes

By Tolley in association with Gill Salmons
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The following Employment Tax guidance note by Tolley in association with Gill Salmons provides comprehensive and up to date tax information covering:

  • Double taxation agreements and employment taxes
  • Introduction
  • Treaty Article 4
  • The employment income Article
  • Tax equalisation arrangements
  • Exceptions ― when there is no double tax treaty
  • Economic employer
  • Summary

Introduction

In some circumstances, an individual may be liable to tax in two jurisdictions simultaneously where he is employed in one country but spends time working in another. A double tax treaty between countries can be relied upon in many cross-border situations to exempt an income source from taxation in a particular country. However, double tax treaties are not all identical and care should be taken in determining how treaty provisions may apply to individual employees.

This guidance note covers double tax treaties as they apply to employment income, but it does not cover international social security agreements (for which, see the Social security agreements guidance note).

Treaties are generally set out in a standard format with the same article number addressing the same issue in every treaty. In order to ascertain the employment tax position for an individual employed in one country but spending periods working abroad, Article 4 and the ‘income from employment’ Article of the applicable treaty are the most relevant.

Treaty Article 4

The residence Article of a double tax treaty is usually Article 4, which deals with an individual working outside the country in which he is deemed to be resident for the purposes of the treaty provisions (treaty resident). It is possible to be resident under domestic legislation in multiple countries at the same time, and Article 4 helps to establish which of the two countries covered by the Treaty will have the primary taxing rights over certain types of income ― namely, which country is allowed to tax the income first and which country will be obliged to allow either a credit for that overseas tax suffered or an exemption of that income from tax.

Article 4 is important when trying to exempt employment income under a treaty because the wording of the employment Article of the treaty will