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Tax treaties on the exclusion of double taxation have been concluded between many countries in order to avoid the situation whereby a businessman is liable for income tax twice - firstly in the country where the income was gained, and secondly in the country where he is a resident (a taxpayer).
Treaties on the exclusion of double taxation are usually applicable in the instances when taxes are imposed on:
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| – | profits gained by a resident of one country within the territory of another country |
| – | dividends paid in one country to residents of another country |
| – | interest paid in one country to residents of another country |
| – | royalties and license fees paid in one country to residents of another country |
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It should be noted that the benefits of interstate treaties are available only to those companies who are in fact taxpayers in the country of registration. The tax-free status of a company and tax exemptions granted by interstate treaties are mutually exclusive; indeed, no tax authorities in any jurisdiction will confirm that a company is a taxpayer in this country if, in fact, companies of this type do not pay any taxes in this country. Therefore, tax exemptions of interstate treaties are not applicable to IBC companies and to certain types of companies registered in taxpaying countries, who do not pay taxes there, in accordance with the specific legislation of the country of registration.
Tax treaties on the exclusion of double taxation can be used efficiently if the tax rate for the same income is known to be lower in one of the two countries bound by the treaty. In particular, the optimal methods of using interstate treaties are:
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| 1) | When dividends, interest or license fees are paid to non-residents, the country of payment imposes, as a rule, the so-called witholding tax, usually amounting to 15-25%. At the same time, interstate tax treaties often prescribe a lower or zero tax rate for these types of payments.
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| 2) | Most interstate tax treaties make provisions for certain business activities, which can be carried out by a resident of one country in another country and are not regarded as the setting up of a permanent representation in the latter country. This means that a company from one country can carry out certain business operations in another country, but may pay income tax in the first country, which has lower tax rates.
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Treaties on the exclusion of double taxation are most often used in commercial and holding operations, using jurisdictions such as Cyprus, Ireland, Denmark, etc.
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