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Last week we talked about income tax taxes abroad; let's continue this week about double taxation.
There is a risk that your income may be taxed twice if two countries have the right to tax your income because, for instance:
In these situations, while you will always be subject to the tax rules of your country of residence, you may also have to pay taxes in the other country.
Fortunately, however, most countries have double tax agreements. These agreements usually spare you from double taxation:
under many bilateral tax agreements, the amount of tax you pay in the country where you work will be offset against the tax you owe in your country of residence
in other cases, the income earned in the country where you work might be taxable only in that country and exempt from tax in your country of residence
You should note that the tax rates in the two countries involved will most likely be different. If the tax rate in the country where you work is higher, that is the final rate you will pay - even if the tax paid in that country is offset against the tax due in your country of residence, or if your country of residence exempts you from any further tax.
To claim relief from double taxation, you may need to prove where you are a resident and that you have already paid taxes on your income. Check with the tax authorities what proof and which documents you need to submit.
WHAT RULES APPLY IF YOU ARE:
A cross-border commuter
Suppose you live in one EU country and work in another. In that case, the taxation rules applicable to your income will depend on national laws and double tax agreements between these two countries - and regulations can differ considerably from those that determine which government is in charge of social security issues.
Depending on the double tax agreement, you may have to pay taxes in your country of work as well as in your country of residence:
If you are an employee, the country where you work will, in most cases, tax the income you earn on its territory.
Suppose you are self-employed and registered in the country where you live but provide services across the border. In that case, you will generally have to pay income tax in the country where you assist if you set up a 'fixed base' or 'permanent establishment' (such as an office or a shop) there. Check with the tax authorities which rules apply to your case.
Suppose you live in one EU country but earn all or almost all of your income in another and pay tax there. In that case, the country where you make your income should treat you as it would treat a resident. That is, it should give you the same tax reliefs and tax exemptions and any other tax benefits available to residents, such as personal allowances or the possibility to complete a joint tax return with your spouse.
A worker posted abroad.
If you are posted abroad for a short assignment (up to 2 years), you will remain under your home country's social security system. However, the income earned during a posting abroad may be taxed in the host country.
When posted abroad by your company, you may not have to pay tax in the country where you work on the income you earn during your posting if:
You stay abroad for less than six months in a year and
Your salary is paid directly by your employer (at home) rather than by a branch or other company your employer has in the country where you work.
An employee working in one EU country for a company based in another
If you live in one EU country and work there for a company based in another EU country, you will typically, under most tax treaties, be subject to tax only in your country of residence.
An unemployed person looking for work abroad
If you spend a short period (less than six months a year) in another EU country without working there, you probably won't be considered a resident for tax purposes in that country. In that case, any transferred unemployment benefits should be taxed only in the country that pays them.
If you spend more than six months in a year in another EU country, you could be considered a tax resident of that country and unemployment benefits transferred from another country may be taxed there. Indeed, under many bilateral tax agreements, unemployment benefits are subject to tax only in the land of tax residence.
A retired person abroad
If you have retired to another EU country and spend more than six months a year there, that country may consider you a tax resident. If so, you may have to pay tax to that country on your total worldwide income - including pensions you receive from other EU countries.
Exception: public sector pensions are usually taxed only in the country of the administration that employed you.
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I'm Natalia Bertelli, an English/Spanish to Italian legal translator. Since 2008 I have been working on contracts, judicial deeds, certificates, corporate translations for foreign clients who want to do business in Italy, get a dual citizenship or simply settle in my beautiful country.