Tax treaties and expatriates

The UK has an extremely sophisticated and large network of double tax treaties. How much do you know about what a double tax treaty is there for? And do you understand how they affect you?

One myth is that you can use a relevant treaty to choose where to pay tax. This is not correct, as tax treaties are designed to decide where taxes on different income, gains and inheritances are taxable, when assets are located in one country and the individual is resident in another. They generally also contain ‘tie-breaker’ clauses where an individual satisfies domestic resident laws of both countries.

Tax treaties are very detailed, and all are different, so to make sure you apply them correctly to your situation, you should seek professional advice from a firm experienced at guiding expatriates through the detail and effective tax planning.
Another myth is that income taxable in one country cannot be taxable in the other. In many cases income remains taxable in the source country but can also be taxed in the country in which the individual is resident. To avoid double taxation (being taxed in both countries), tax paid in the source country is offset against the liability in the country of residence.

Where income can be taxed in both countries under the terms of the treaty, each country is able to apply its own rules in calculating the taxable income and actual tax payable. While tax paid in the source country can be offset against the tax payable in the country of residence, if the tax paid in the source country exceeds that payable in the country of residence, no further tax is due in the country of residence. If the tax payable in the country of residence is higher than that payable in the source country, you pay tax in the source country and then pay the difference between the two amounts in the other country. You always end up paying the higher of the two amounts.

The trick here, of course, is to minimise the tax in both countries legitimately so that the minimum amount of tax is paid. A cross-border specialist adviser can help you ensure you minimise taxes in both countries, so that your overall tax liability is minimised.

Generally, certain types of income and gains are only taxable in the country of residence and others are taxable in both countries. For example, capital gains on real estate, dividends and bank interest are often taxable in both the country where the income arises and the country of residence (although not always).

However, state, occupational and private pensions and annuities are usually only taxable in the country of residence. This is the case for most types of pension income under the UK/Portugal double tax treaty even if no tax is actually paid in Portugal (which is the case under Portugal’s Non-Habitual Resident ‘NHR’ regime). Government service pensions are usually taxable only in the source country.

If you are a non-habitual resident or planning to become one, the relevant double tax treaty will determine whether the foreign source income in question is tax-free in Portugal under the NHR or not.

For example, under the regime, a capital gain is exempt in Portugal if it may be taxed (under treaty rules) in the country of source. So gains on UK real estate escape tax in Portugal as the UK/Portugal treaty says that immovable property gains may be taxed in the country the property is located. However, capital gains on shares are only taxed in the country of residence, so gains on UK shares are not exempt in Portugal.

The UK only has 10 treaties regarding taxes on death, not including Portugal. These are with France, Italy, India, Pakistan, USA, Sweden, Ireland, South Africa, Netherlands and Switzerland.

There are also exchange of information agreements, to share information on assets and income for tax purposes.

Where there is no double tax treaty governing where income is taxed and how relief is given for double taxation, the UK will give ‘unilateral relief’ where another country charges tax on assets that are also taxable in the UK. Unilateral relief is also given where both the UK and another country tax income or assets in a third country.

Double tax treaties supersede national law and take precedence over either country’s domestic rules. It is essential to have an adviser who understands how any relevant double tax treaty applies to you and works in relation to Portugal’s domestic laws. We recommend you take advice from an expert knowledgeable regarding the tax treaty and both countries’ laws. They will be able to assist you in understanding exactly what will be taxed where, when and how, as well as assisting you in minimising taxation.

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.

By Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.