Double taxation is a monetary overburden for individuals and businesses. To comprehend how to avoid double taxation, you need careful planning and right strategies. For this – and many other –  purposes, L&Y Tax Advisors is at your service!

Our competent professionals help you recognize the complexity of domestic and international taxation. We shall assist you in protecting your earnings from needless tax burdens.

What is Double Taxation?

Double taxation is imposed when the same income, financial transaction, or asset is subject to tax in multiple jurisdictions or at different levels. For instance, corporate income is taxed at:

• Company level, and
• (Again) when distributed to shareholders

Double Taxation Example

Suppose that a business firm earns profit. It pays corporate income tax. Afterwards, it distributes dividends to shareholders. Shareholders also pay personal income tax on that same profit. This is classic domestic double taxation.

On the international scale, an individual earning income in a foreign country is taxed both by the:

• Country where the income is earned
• Country of residence

Read: What is a VAT number in the US?

Is Double Taxation Legal?

Yes, double taxation is legal under several tax systems. It arises because different jurisdictions claim the right to tax based on either:

• Residence, or
• Source of income, or
• Both of the above

To decrease or omit double taxation, several countries adopt relief mechanisms, such as:

• Tax treaties
• Foreign tax credits

How to Not Be Double Taxed?

There are strategies to avoid or minimize double taxation:

• Leverage tax treaties among countries to determine which jurisdiction has taxing rights.
• Utilize foreign tax credits or exemptions (where available). For instance, a taxing country gives credit for taxes that are already paid abroad.
• Select an appropriate business structure (for corporate-earnings) that helps minimize multiple layers of tax.

Read: What is tax yield?

How to Avoid Double Taxation?

To proactively avoid double taxation:

• Review any double tax agreements (DTAs) or conventions related to your residence or source country.
• Ensure that you claim foreign tax credits correctly. Maintain records of taxes paid abroad.
• Align your business or investment structure. Doing so helps in smooth income flows and residency status optimize taxation. For example:

• Keeping profits within entities
• Deferring distributions
• Paying wages instead of dividends.

• Consult with a tax advisor early to evaluate your:

• Income sources
• Residency status
• Potential for double taxation

How to Avoid Double Taxation on Foreign Income?

When you earn income in one country and reside in another:

• Check for treaty provisions that provide relief or allocate taxing rights.
• If your home country offers these measures, use foreign:

• Earned income exclusion
• Tax credit

• Document the foreign tax paid. Maintain eligibility for the relief. Make sure you correctly report worldwide income (where required).
• Meet any conditions of residence or physical presence tests if using foreign-income exclusions.

Read: What is the meaning of lieu in income tax?

The Bottom Line

Comprehending how to avoid double taxation reveals that this burden is not inevitable. Study its ‘nature.’ Review applicable treaties. Structure your income and entity strategy carefully.

Minimize or omit the chances of being taxed twice on the same currency. With thoughtful planning and expert advice, keep more of your hard-earned income working for you instead of serving as redundant tax payments.