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Q: A client is deemed to be resident in two countries and therefore taxable on worldwide income in both countries, how do I establish which country can claim tax residence?

A: A look at the tie breaker rules under the double taxation treaty between both countries which is found under the ‘residence’ section of the treaty. Tie breaker tests are a series of rules to be applied until residence is allocated to one state or another.

If the tie-breaker rules allocate residence to the other country the effect on the UK can be wide reaching. If your client is treaty resident in the other country, they are entitled to make claims to relief from UK tax (using HS302) that is provided for under the agreement on the basis that the individual is resident of the other state. Result:

  • Income/ gains of a type which is dealt with in the agreement and which arises in the other State is always exempt from United Kingdom tax.
  • Income arising in other overseas territories is exempt if the agreement has an `other income’ Article.
  • Only UK source income can be taxed and then only to the extent that such income can be taxed in the hands of a sole resident of the other State. Special rules may however apply where any income (including foreign income) is connected with a business or profession which the individual carries on in the UK.

These publications from Markel Tax were correct at the time of going to press and should be considered as principles-based guidance only. To check current validity, call the Markel Tax helpline. ICAEW (as distributor) disclaims all liability for any errors or omissions.

About Markel Tax

Markel Tax offers expert advice on UK tax and VAT via its helpline and provides monthly FAQs with questions and answers on common tax issues for businesses and practitioners.