How does double taxation work?

If you are a UK resident and generate income from another country, you must be aware of the Double Taxation Agreement. Every payment is taxed and levied on international workers who are a resident of a particular country and earn from other countries.

Many governments have recognised double taxation may be unfair. It will prevent international business and trade. Each country has its own rules for avoiding the same income. The amount can be taxed in one country and may be due in another.

How does double taxation work?

What is double taxation?

Double taxation refers to the tax principle paid on the income twice for the same source. Double taxation is when your income is taxed on a corporate and personal level. It may happen in the case of investments across international trade. If the same income is taxed in two countries, it leads to double taxation. The 401k loans can also be prone to double taxation.

How does double taxation work?

If corporations are regarded as different entities from shareholders, it will be regarded as double taxation. The corporation will need to pay tax for annual earnings, similar to the individuals. The businesses may need to pay dividends to the shareholders. These dividends will, however, be prone to income-tax liabilities and require cash to settle along with the corporate level.

The tax legislation of a particular country will have a huge role in determining double taxation. Many consider this a negative impact because of the tax system, and it is also regarded as a negative activity in many countries. Most tax authorities try to avoid the risk of double taxation as much as possible.

The tax systems will, however, vary depending on the credits and rates. It will often be integrated into the system and earned as per a corporation, and it can be paid out in income and dividends as the individual earns it. However, the tax levied on it will be the same in many cases.

Corporation Tax

Your company will be considered a UK resident company only if it is incorporated in the UK. Therefore, the business will need to legally pay the UK Corporation Tax based on global profits. The corporation tax is set at 19% for the current financial year. The tax will need to be paid for investment income, business and selling business assets.

The UK resident company will not be liable for paying the corporation tax to foreign countries. However, the trading establishment must be clearly defined. Businesses that want credit relief on the UK Corporation tax must apply to the HMRC. However, this will only be valid for businesses that have foreign branches.

A UK resident will not need to pay Corporation Tax to foreign countries for the profit that they make in that country. However, they will need to make the tax on the profits they make as UK Corporation Tax.

Register for UK corporation tax

Once you register your company in the UK, make sure you are also registering for Corporation tax. The deadline for registration is no less than three months. After that, you can start doing business accordingly. You also need to provide complete information regarding the registration process, and you should file for company tax returns too.

The deadline for paying the company tax is around 12 months. However, you must pay the UK Corporation tax within 9 months after the accounting period.

Value added tax

The UK's rules for Value Added Tax or VAT are slightly complicated. It is mostly applicable to businesses that have branches in foreign countries, and businesses in the UK will need to follow the VAT obligations accordingly.

It will completely depend on whether you have the services and goods. When you're considering this, you will need to follow the VAT regulations for UK limited companies. It would help if you considered the regulations for countries where the stocks will be regulated and for the UK and your own country.

VAT in the UK

The UK follows its own set of VAT rules. As per the current year rules, you will need to file the VAT only if the taxable turnover of the company is greater than £85,000.

The VAT position will also vary once you plan to trade outside the UK. You should follow all the regulations.

If the turnover is below the threshold, you will not need to register for VAT. You will not be charged. Businesses can consider opting for VAT even when the turnover is below the threshold.

However, companies who voluntarily register for VAT need to check all the benefits the company offers. Furthermore, they can also consider claiming back VAT. The VAT-registered business may need to pay for the services and the goods accordingly.

Double taxation will not apply to VAT

VAT is different from other taxes and may not be eligible for double taxation relief. VAT is the indirect tax that a business may collect on behalf of the government. However, companies can charge for specific products and services they sell. It may also depend on the government's rules and regulations for VAT payment.

  • Avoiding double tax
  • Businesses can avoid double taxation by taking the right measures. Here are some of the measures companies can follow to avoid the double tax:
  • Smaller businesses can provide some shares to the employees.
  • Not registering the business as a corporation
  • Adding shareholders as payroll members of the board.

Determining the structure of the business can play an essential role in helping you avoid the double tax. Employees can pay the income tax rather than the corporation tax, and it is advisable to distribute the dividends to avoid getting in trouble for double taxation. You can also choose to put the income back into the company.


Double taxation is common, and most businesses become prone to it. The best thing to do is analyse your business structure and implement them accordingly. However, taking care of the basics or reaching out to an accountant can be of great help when it comes to solving double taxation, especially for businesses of all sizes.

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