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Tax Treaty Considerations for Expats in the United Kingdom

Submitted: April 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside the UK, and intend bring money earned from them into the UK during your stay. They also apply if you build up some investments in the UK during your stay, and intend to leave them here after you have left the UK.  The UK has the widest tax treaty network in the world with treaties in force with over 100 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed here in the UK; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as HMRC’s definition of tax-residence. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

For the complete rules and rates it is necessary to read the treaty itself. A link to each UK treaty in force can be found here. The sections dealing with dividends, interest and royalties can usually be found half way through the treaty document.

An abbreviated table of the terms of all the UK treaties in force can be found here. The wording of the treaties can be complex, but there are often simpler guidance notes available for each treaty.

The UK does not charge withholding tax on dividends sent to other countries.

The withholding tax rate in France on interest sent to a country without a tax treaty is 20%, if sent to a country with a tax treaty it is generally reduced to 10% to 15%.

The withholding tax rate in France on royalties sent to a country without a tax treaty is 20%, if sent to a country with a tax treaty it is generally reduced to 10% to 15%.

The UK’s tax treaties with other countries generally restrict the amount of withholding tax those countries can charge UK residents on dividends, interest and royalties to between 5% and 15%. However for the actual applicable amount, you will have to read the relevant treaty itself.

Prior to arriving in the UK you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-UK country to another to reduce the tax rate paid.

If your home country has a generally lower rate of tax than the UK, you may be able to use the residency definitions in the treaty to show that you are still a tax-resident in your home country. By doing this you may avoid paying some UK tax on overseas income from work outside the UK and non-UK dividends, interest, royalties and capital gains.

If your home country has a generally higher rate of tax than the UK, you may benefit by becoming tax-resident in the UK as early as possible.

At the end of your stay in the UK you can also rearrange your affairs to ensure that any on-going income from UK-based employment or investments is also taxed at the lowest rate possible in the future.

 

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