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March 19, 2025
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Tax Planning • March 19, 2025
Non-Residents’ Guide to Double Taxation: How to Avoid Overpaying
Hoxton Blog • Non-Residents’ Guide to Double Taxation: How to Avoid Overpaying
Moving abroad can come with financial benefits, but it also raises important tax questions.
One of the biggest concerns for people moving overseas is double taxation, being taxed on the same income in two different countries.
Paying tax the first time is painful enough, let alone having to pay it twice. But without proper planning, that’s exactly what can happen. Luckily, there are specific rules that allow you to avoid double taxation, as long as you use them properly.
Understanding how double taxation agreements (DTAs) work and using the right tax strategies can help reduce your tax bill, and ultimately allow you to reach your financial goals sooner. With the right approach, you can make sure you’re not paying more than you should while remaining in the good books with tax authorities in both countries.
Understanding Double Taxation
Double taxation happens when two countries have the potential right to tax the same income. This could apply to salary earnings, rental income, dividends, retirement accounts, or capital gains. Many people face this issue when they become tax residents in a new country but still have financial ties or need to file taxes back in the home country.
Tax residency is the term to be aware of here. Just because you live in a certain country doesn’t necessarily mean you are a tax resident there, and just because you’ve left your home country doesn’t mean you automatically stop owing taxes there. The rules on tax residency can be complex and can also vary between countries, so seeking some professional advice is always advisable. Trying to DIY taxes when you first move abroad is not something we would advise you to do!.
If you still earn income in your home country from sources like property rentals, investments, or retirement assets, you may have to pay tax on that income in both your new country and your home country. Alternatively, you may only have to pay it in the country of your tax residency.
How Double Taxation Agreements Work
To prevent unfair tax burdens, most countries have double taxation agreements with other countries. These agreements are designed so that people aren’t taxed twice on the same income. They determine which country has the primary right to tax certain types of income and provide mechanisms for claiming tax relief.
Generally speaking, it’s the country where you are a tax resident that will have the rights of taxation for income earned in that country – unless you are a US citizen or greencard holder and have to pay taxes on your worldwide income. However, this doesn’t necessarily mean that you won’t have to pay any tax at all in the other country.
Here's an Example
For example, if you’re a UK expat living in Spain with UK-sourced income such as personal pensions, the Spanish tax agencies will have the right to tax this income.
However, if you own a rental property in the UK, the details of the DTA state that the UK has the right to tax this first. If Spain also taxes you on it, you can usually claim a tax credit to avoid paying the full tax rate twice.
As you can see, the details of each individual DTA are very specific and understanding the impact on your situation will depend on the details of which DTA will apply and the makeup of your income and assets, hence why seeking professional advice is always a good idea.
Similarly, if you're a US citizen living in Spain, the US operates on a citizenship-based taxation system, meaning you’re required to report and potentially pay tax on your worldwide income, regardless of where you live. However, Spain also has the right to tax your local income. The US-Spain DTA helps prevent double taxation by allowing credits for taxes paid in Spain against your US tax liability. Additionally, some types of income, like Social Security benefits, may be taxed only in one country, depending on the treaty’s specifics.
As you can see, the details of each individual DTA are very specific, and understanding the impact on your situation will depend on which DTA applies and the makeup of your income and assets. This is why seeking professional advice is always a good idea.
Strategies to Avoid Being Taxed Twice
Because these rules are so specific and detailed, double taxation can be avoided with careful planning. Here are some tips to help manage tax across multiple countries:
Know your tax treaty (or pay someone who does)
Understanding the specific DTA between the your home country and your new country of residence is key. Some agreements exempt certain income types (as in the example above), while others provide foreign tax credits that lower your bill.
As you might expect, these agreements don’t make for relaxing bedtime reading. They are very detailed and complex, which is why most people enlist the help of professionals who can advise them on how best to arrange their tax affairs.
Tax residency status matters
The Statutory Residence Test (SRT) determines whether you’re still considered a tax resident. If you spend too many days in the your home country be it for work or personal matters, you could remain liable for tax on your worldwide income, even if you consider ‘home’ to be elsewhere. Being mindful of the SRT rules can help prevent unexpected tax obligations, and avoid the need to midnight flight out of the country to avoid a hefty tax bill.
In the US, tax residency is determined by:
- Substantial Presence Test (SPT): If you spend 183+ days in the US over three years (using a weighted formula), you may be taxed on your worldwide income.
- Green Card Test: Green card holders are US tax residents unless they formally surrender their status.
To avoid US tax residency, individuals can:
- Track their US days to stay under the SPT threshold.
- Apply for the Closer Connection Exception to prove stronger ties elsewhere.
- Use tax treaties to prevent double taxation.
- Plan travel strategically to avoid triggering tax liability.
Like the UK’s Statutory Residence Test (SRT), knowing the rules helps prevent unexpected tax bills (or a last-minute flight out!)
Common Mistakes and How to Correct Them
As you’d expect, with this level of complexity there are plenty of common mistakes when it comes to dealing with cross-border tax issues. Here are some of the most common:
Ignoring your home country tax obligations
Many individuals assume that once they leave their home country, they no longer have tax obligations. However, maintaining bank accounts, rental properties, or investments may still trigger tax liabilities. If you are a US citizen or greencard holder – you still need to file a tax return and report your global income.
On the flip side, you may also not be able to take advantage of tax reliefs if you’re a non-resident. One common example is ISA allowances, which aren’t available to non-residents. The same goes for reliefs into retirement accounts such as 401ks, IRAs and UK personal pensions.
To avoid this issue, make sure you work through all of your sources of income each year, and review how these are treated under the double taxation agreement of the countries involved. You should also be sure to review your tax residency each year so that it remains up to date.
Not declaring foreign income
As you can probably guess, undeclared income can lead to penalties. Even if tax has already been paid abroad, failing to report income correctly to tax authorities such as HMRC, the IRS and the ATO can cause compliance issues. In some cases you may need to pay tax in both jurisdictions, so declaring the income properly can ensure you pay the right amount overall.
It’s an easy fix for this issue. Expats should ensure they complete the right forms,, to claim foreign tax credits or exemptions. As always, professional advice can be a major help in ensuring this gets done properly.
Poor record-keeping
Another common mistake is not keeping records of taxes paid in both countries. Many tax authorities require proof of foreign tax payments to grant relief, which is important if you’re planning on claiming credits for tax already paid.
Keeping detailed records of tax returns, pay slips, and tax receipts helps prevent issues when claiming double taxation relief.
Proactive Cross-Border Tax Planning
The key to good tax planning is to be proactive. Taking a reactive approach means you're stuck with whatever the tax rules happen to be, rather than structuring your affairs to take advantage of them in the most effective way.
As mentioned, a big part of this is to make the most of available reliefs and exemptions, review your tax residency status each year, and understand the impact of DTAs on investments and pensions.
Structuring investments tax-efficiently is another key factor. Holding assets in tax-friendly jurisdictions or using tax-efficient investment accounts, can reduce exposure to both home and foreign taxes.
For expats with businesses, understanding how corporate tax rules apply internationally is a whole additional layer of complexity. Some countries impose taxes on worldwide income, while others offer incentives for foreign-earned business profits. Setting up the right business structure can prevent double taxation issues, as well as help you manage your income from the business tax effectively.
How Hoxton Wealth Can Help
Cross-border tax planning is complex, and without the right advice, the risk of overpaying is high. At Hoxton Wealth, it is our mission to help people structure their finances efficiently, ensuring they don’t pay more tax than necessary while remaining compliant in their home country and their new country of residence.
Whether you need help with double taxation relief, retirement account transfers and consolidation, or investment tax planning, our team of advisers can provide advice that is tailored to you. We work with individuals and businesses all around the world to ensure they take full advantage of tax treaties and make the most of their financial position.
Get in touch today to see how we can help you avoid double taxation and keep more of your money working towards your financial goals.
Disclaimer: This article is for informational purposes only. Hoxton Wealth is not a provider of legal or tax services, and we recommend consulting with the appropriate professional advisors before taking any action. The opinions shared here are based on current conditions and may change. This information does not account for individual investment goals, so do not make investment decisions based solely on it. Please consult your Financial Professional before acting.
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