International tax relief rules in the UK primarily function is to prevent double taxation – i.e., the situation in which the same income or gains are taxed in more than one country. The UK has two main methods to relieve double taxation: Tax Treaties and Unilateral Relief.
  • Tax treaties, also known as Double Taxation Agreements (DTAs), are agreements between two countries that define which country has the right to tax different types of income or gains. The UK has one of the largest networks of DTAs in the world, covering over 130 countries.
  • DTAs determine which country has the taxing rights on various types of income, such as dividends, interest, royalties, and employment income. They also contain provisions to resolve disputes and eliminate double taxation.
  • For Example : If a UK resident earns employment income from working in another country with which the UK has a DTA, and that income is taxed in the other country, the UK will usually provide a credit for the foreign tax paid.
  • If there is no DTA between the UK and the other country, or if the income or gain is not covered by a DTA, the UK provides Unilateral Relief. This is a provision of UK domestic law that allows a credit for foreign tax paid on income or gains that are also taxable in the UK.
  • The credit is limited to the lower of the UK tax on the foreign income or gains and the foreign tax paid. So, if a UK resident has investment income from a foreign country that is taxed at 10% in that country, and the UK tax on that income is 20%, the UK will give a credit for the 10% foreign tax paid, and the individual will have to pay the remaining 10% of the tax to the UK.
  • For corporations, double taxation relief may come in the form of an underlying tax credit for foreign tax suffered on the profits out of which dividends are paid.
  • Additionally, the UK has provisions for group relief of losses where a UK company and a foreign company are part of the same group. Under certain circumstances, the losses of one company can be used to offset the profits of another, thereby reducing the group’s overall UK corporation tax liability.
  • It’s worth mentioning that these are complex areas of law and their application can vary significantly based on individual circumstances. Therefore, professional advice is often recommended when dealing with these issues.
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