Double taxation treaties are agreements between two countries that aim to avoid or reduce double taxation of income and capital. These treaties establish which country has the right to tax certain types of income, and they contain provisions for relief for foreign taxes paid. In some cases, only one country has the right to tax, and in other cases, both countries have the right to tax. Therefore, agreements have been made about which country should provide relief for taxes paid and by which method relief can be granted.
Frequently Asked Questions About Double Taxation Treaties (DTTs)
What is a double taxation treaty?
A DTT is an agreement between two countries that establishes how taxation of income should be distributed, so that the same income is not taxed twice.
How do double taxation treaties determine residence country and source country?
Double taxation treaties (DTTs) help establish which country is the residence country and which is the source country for a given income. The residence country is the country where you have tax residence, while the source country is the country where the income originates – for example, where the work is performed, or from where the dividend is paid.
What happens if two countries disagree about taxation rights?
If disagreement arises between two countries about taxation rights, double taxation treaties provide the opportunity to use a mutual agreement procedure. The countries' tax authorities can enter into an agreement about the distribution, so that the citizen or business avoids double taxation.
What methods does Denmark use to provide relief under double taxation treaties?
According to double taxation treaties, Denmark uses two main methods:
- Exemption method: The income is exempt from taxation in Denmark
- Credit method: Denmark taxes the income but provides a credit for tax paid abroad
The choice depends on what is stated in the specific DTT between Denmark and the other country.
How are salary, pension, interest, and dividends taxed under a DTT?
A DTT determines where salary, pension, interest, and dividends should be taxed. For example, salary will generally be taxed in the country where the work is performed, while the residence country can provide relief for the tax paid in the source country. For pensions, the rules depend on what is agreed in the DTT.
How do double taxation treaties affect companies?
A double taxation treaty (DTT) can help establish where a company is considered resident – for example, based on where the management has its seat, or where the company has a permanent establishment. This determines which country has the right to tax the company's profits.
How do DTTs handle dividends, interest, and royalty payments for companies?
Additionally, a DTT can help determine how dividends, interest, and royalty payments are taxed, and ensure that the income is taxed correctly in the recipient country.
Disclaimer
As the above is for guidance purposes only, we accept no liability for decisions that may be made based on the above without prior individual advice. We accept no liability for errors and omissions.
