Contractors’ Questions: How do double taxation treaty payments work?

Contractor’s Question: I am a contractor working via my own limited company incorporated in England as its director. And at the same time, I am tax resident in Cyprus.

My company is therefore paying Corporation Tax (CT) of 12.5% in Cyprus, and as CT in the UK is 19%, must I pay the difference of CT 6.5% to HMRC according to the double taxation treaty? What are the pitfalls I should beware in my situation when staying tax-compliant?

Expert’s Answer: The crucial piece of information that you do not provide is where you are physically carrying out your work via the limited company.

Because of the terms of the UK/Cyprus Double Taxation Treaty, your company, although incorporated in England, is likely to be treated as resident in Cyprus (see Article 4 of the Treaty). As such, the company is liable to UK tax only if and to the extent that it carries on business in the UK through a “permanent establishment” (see Article 8), or otherwise has income which derives from a UK source. 

In respect of such income, the UK has primary taxing rights so tax would be payable to HMRC at UK rates. In principle, Cyprus tax would also be payable on that income, but full relief would be given against Cyprus tax for UK tax paid on the same income, so in practice no Cyprus tax would be payable.

If your company does not carry on business from a “permanent establishment” in the UK and has no UK-source income, the company has no liability to UK tax on its income. However, if the company is carrying on business in a third country, you would need to consider the possibility of tax being levied by that country.

This would require you to consider not only the domestic tax regime in that country but also the terms of any double taxation agreement between that country and Cyprus. Even if there is such a treaty, do not make the mistake of assuming that its terms will be the same as the UK-Cyprus treaty: it is never safe to ‘read across’ in this way.

Finally, you should also consider the tax treatment of any remuneration that you receive from your company. Broadly, under domestic law this is likely to taxable in the country in which the work is physically performed although this rule may be softened by a double taxation treaty – see for example Article 15 of the UK-Cyprus treaty. Your company may also have an obligation to account for payroll taxes in any country in which it operates; again, you would need to take local advice.

The expert was David Whiscombe, a former partner with chartered accountants and tax advisers BKL, and who is now a part-time consultant to the firm.