Many entrepreneurs and business owners decide to open their own UK legal entity to utilise the country’s friendly corporate regime and take advantage of various tax reliefs and incentives. However, when it comes to comprehending tax laws and compliance, double taxation is among the most challenging topics for UK legal entity owners.
To protect taxpayers from double taxation, some countries have established double tax treaties with the UK.
What are double tax treaties?
Double tax treaties can be defined as two-party, international agreements made between two countries, with the purpose of protecting taxpayers from being taxed on the same income in both their country of residence and the country where the income is generated.
This means that if you have your own legal entity in the UK and your country of residence has an established double tax treaty with the UK, the income you generate with your UK legal entity is taxed only once.
The following are the countries that have an established double tax treaty with the UK:
How do double tax treaties work?
When you open a legal entity in the UK, you become subject to 19% corporate income tax. Subsequent to this, you can decide whether you want to keep the profit after taxation in your business as an additional investment or pay out the profit in the form of dividends.
If you decide to distribute profit as dividends, it will be treated as additional personal income and, therefore, will be subject to taxation. This is where double tax treaties come in - to protect you from being taxed twice and ensure that the taxes on your dividend are paid in one country only.
Regarding the location of taxation, the double tax treaty will determine whether you should submit your taxes in the UK or your country of residence. Regardless of the country of taxation, you can rest assured that your hard-earned income is taxed only once and that you’re saving more of your money.
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