What Are Examples of Double Taxation?

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There is a lot of misunderstanding around the subject of double taxation. This topic is especially relevant for expats, people living abroad, and business owners operating in foreign countries, so it is helpful to have a solid grasp of what double taxation really is. In this post, we’ll go over the definition and provide some examples of double taxation. We’ll also look at how the problem of double taxation is reduced or avoided in Spain by various countries by way of bilateral tax treaties and more. As always, for personalized advice on your unique situation as a foreigner living or working in Spain, it is advisable to employ the services of a Spanish financial or legal professional.

Definition of double taxation: what it is and what it isn’t

Officially, the definition of double taxation is when a tax is imposed or levied on the same income, asset or financial transaction before translating into net income.

In the case of expats and foreign business owners, this would involve the person’s income or assets being taxed in both the source country and the home country. This is a problem that can arise due to the different ways in which countries around the world determine tax liability: either by residence or by source.

On the other hand, having different types of taxes levied on the same money does not constitute double taxation, despite what some politicians may argue.

What are examples of double taxation?

Let’s look at an example of something that is double taxation, and another example of something that does not count as double taxation.

Example 1: You are a resident of Country A and have earned income in Country B. Country A subjects its residents’ worldwide income to tax, and obligates you to pay taxes on the income you earned in Country B. Meanwhile, Country B taxes all income earned in its jurisdiction, and obligates you to pay taxes on that same income. This is a classic example of double taxation, and it is a situation that many countries try to avoid as much as possible, recognizing that it disincentivizes foreign investment.

Example 2: You receive your monthly paycheck with income taxes already withheld. Then, you use the resulting net income to buy goods and services, including sales tax. This is not considered double taxation.

Double taxation agreement: Spain and UK

While the United Kingdom remains in the European Union, it is part of a multilateral EU double taxation agreement which allows citizens to declare income in their country of residence only. It also provides a tax deduction in the home country for any taxes that were withheld at source in the source country.

In Spain, fiscal residency is determined by whether you spend 183 days or more out of the year here. So, if you are a UK citizen and live in Spain more than 6 months out of the year, any income you earn need only be reported in Spain. If you carried out some work in the UK, that income would likewise be reported on your Spanish tax declaration. However, if taxes were withheld in the UK at source, those would apply as a deduction to the taxes you owe in Spain.

This policy may change in light of Brexit depending on if a deal is made.

Double taxation agreement: Spain and USA

In the USA, things are not quite so simple. Unlike most countries, the US taxes worldwide income earned by its citizens and permanent residents who are living abroad. This means that double taxation is theoretically possible, although some protections are in place to minimize this. First, there is the Foreign Earned Income Exclusion, which exempts the first $100,000 or so of foreign income from US taxes. Additionally, you can claim a tax credit for any taxes you paid to foreign governments, and you may also be able to get an exclusion for certain foreign living expenses, such as housing.