Tax Treaty

When a person or company earns income across borders, two countries may both claim the right to tax it. A tax treaty, often called a double taxation agreement, sets out the rules.

Treaties typically cover where business profits can be taxed, how much tax can be withheld on dividends, interest and royalties paid to residents of the other country, how pensions and employment income are treated, and tie-breaker rules to decide residence when a person could be resident in both.

For example, a country might normally withhold 30% tax on dividends paid to foreign investors, but a treaty could cut this to 15% for residents of the partner country. The investor may need to file a form to claim the lower rate.

Treaties also include provisions for tax authorities to share information and resolve disputes. Most are based on model treaties published by the OECD or the United Nations. Many countries have dozens of tax treaties, so the outcome depends on which two countries are involved.