When tax treaties don't really help...

Residence & Domicile Oct 6, 2014

Many countries have double taxation tax treaties with one another to allow taxpayers not to pay tax in both countries.

There are more than 3,000 double taxation treaties world-wide, and the UK has the largest network of treaties, covering around 120 countries. Some treaties are more exhaustive than others but even when tax treaties cover all aspects of taxation, there can be situations where can still pay tax twice. Here are a few examples of situations that arise in practice, that we come across on a regular basis and for which unfortunately there is no easy answer.

Social charges that are not considered a tax

France is known for having very high social charges. The country usually arrives dead last in the annual PWC European Tax Review when it comes to social charges. Unfortunately, while the French-UK mentions social charges (CSG and CRDS), those are not listed in the first article of the treaty which means that those costs cannot be considered a tax by the UK authorities. Which in turns means that they cannot be deducted from UK tax.

This is a problem that has become more widespread now that social charges are being levied on property income and gains. The net effect is that a UK resident property owner could end up paying more than 60% tax on French rental income and up to 45% capital gains tax on sale.

Life insurance remittances (rachat partiel d'Assurance Vie)

Another common problem with French nationals in the tax treatment of Assurance Vie. This is a vehicle very similar to an Offshore Bond that allows capitalisation of income tax free. It is very population in France and amongst French Citizens. If your contract is considered by HMRC as an Offshore Bond (there are some constraints of the type of assets an offshore bond can hold), then you will be able to extract upto to 5% of the capital invested every year tax free. But if extract more than that of if the contract is not considered an Offshore Bond, any distribution will be taxed as income. Because the French tax it as capital gain, you will find yourself in a situation where you cannot offset one tax against the other.

Vehicles that don't have the same opacity (eg. SCI and LLC)

The last case we see quite often is when a legal structure is considered transparent in one jurisdiction and opaque in another. Typically, this is the case for an SCI (imposée à l'IR) in France or an LLC in the US. Both are considered transparent in their jurisdiction but opaque in the UK. It means that taxes cannot be offset. For example, if you sell an asset held in a SCI, you will pay capital gains tax in France plus corporation tax in the UK. Similarly, if have an LLC that makes a profit, it will be taxed as income in the US and dividends in the UK and will have to pay both!

It is therefore important not to assume anything when it comes to tax deductibility of foreign tax, even if the tax treaty is very comprehensive.


Franck Sidon

With over 15 years of experience as a Managing Director at TaxAssist Accountants, I have helped thousands of businesses and individuals achieve their financial goals and optimize their tax efficiency.