A double taxation treaty is a legal agreement between two countries. It is also called a double tax agreement, or DTA. The treaty sets out which country taxes what when income crosses a border. Without one, an employee could owe full income tax in two countries at once. That problem is known as double taxation.
How Double Taxation Treaties Work
Treaties assign taxing rights based on a few core factors. These include where the work happens, where the employee is tax resident, and how long they stay. Sometimes both countries keep partial taxing rights. The treaty then provides relief through one of two methods:
- Exemption method: One country simply does not tax the income
- Credit method: Tax paid in one country reduces the tax owed in the other
What This Means When You Hire Internationally
You may employ remote hires, assignees, or frequent business travelers. The applicable treaty determines where payroll taxes belong for each of them. It also decides whether reduced withholding rates apply. Treaties define permanent establishment thresholds too. Those thresholds affect whether your company becomes taxable in the employee's country. One caveat matters here. Treaties usually cover income tax, not social security. Social security is handled separately through totalization agreements.
Key Takeaway
Check whether a treaty exists before you hire in a new country. An Employer of Record applies the correct treaty position for you. Your employees get taxed once, in the right place.