If a person has income from a source in one country and is resident in another, that same income can suffer tax twice. Double Tax Relief (DTR) is designed to alleviate this double charge on the same source of income. The UK provides three options for providing relief from double taxation – two via a form of tax credit and one by way of deduction from the profits of the business.
Of the two forms that provide relief via a tax credit, one is called unilateral relief which is provided under UK domestic legislation and the other is through double tax treaties with other countries. Under unilateral relief, the amount of DTR is calculated on a source by source basis. The basic rule is that the relief available is the lower of the UK tax due on that source of income and the foreign tax suffered.
The precise mechanism for relief under a double tax agreement will vary from treaty to treaty. The treaty will typically provide either an exemption from taxation in one of the countries concerned or by providing a reduced rate of tax.