Double taxation agreements

Double taxation agreements are international agreements, whose objective is to avoid the situation in which the same income or the same property becomes the object of taxation twice in two different countries.

There are three types of double taxation

  1. International economic double taxation: the same type of income is subject to taxation of different amounts in two different countries.
  2. International legal double taxation: the same entity is subject to tax withholding of two identical amounts in two different countries.
  3. Internal double taxation: in some countries different units, such as administrative and territorial, collect a similar tax at the regional and federal levels.

In offshore more often we find the second type of double taxation, the international legal double taxation. Choosing offshore jurisdiction for registering a company, it is very important to determine the amount of tax your company has to pay to exercise its activity and determine the existence of double taxation agreements between beneficial owner´s country of residence and offshore territory where the offshore company will be set up to avoid double taxation. In general, an offshore company that carries out activities related to international trade and the provision of services represents can obtain a status of tax exempt. 

However, when it comes to investment in some low tax territories, a treated jurisdiction is required to avoid double taxation and to minimize the impact of taxes. Jurisdictions that do not have agreements of double taxation avoidance are used primarily because of the absence of taxes on corporate income and offshore companies and generally require an offshore company to pay only a fixed annual fee to the government of the jurisdiction. In addition to the basic functions that are avoided (eliminating or reducing) the double taxation agreement in relation to the preferential tax treatment of income in the country of residence, entities may create additional opportunities to minimize tax liabilities of offshore companies.