L2. Double taxation BE671

Formula

(Foreign income/total income) x Home State tax on total income

You have worked in Sweden (Home State) as well as in state X and state Y. You have earned salaries of 30 000 EUR (Sweden), 30 000 EUR (State X) and 40 000 in State Y, resulting taxes of 6000 EUR in State X and 20 000 EUR in State Y. Swedish law stipulates a progressive tax rate for salaries, with a tax rate of 30% up to 50 000 EUR and 50% of exceeding amount. Calculate total tax if Sweden provides for full exemption of your foreign income.

30% tax on 30 000 EUR= 9000 EUR Total tax: 9000+6000+20000= 35000 EUR

examples of a permanent establishment

A fixed place of business outside the state of residence: - place of management - branch - office - factory - workshop - natural resources - a person acting on behalf of an enterprise and concludes contracts

Exemption with progression

Income is included in the Home State's tax base. Exemption for foreign income's part of total tax. Only purposeful if Home State has a progressive tax rate, commonly only used for taxation of individuals.

You have worked in Sweden (Home State) as well as in state X and state Y. You have earned salaries of 30 000 EUR (Sweden), 30 000 EUR (State X) and 40 000 in State Y, resulting taxes of 6000 EUR in State X and 20 000 EUR in State Y. Swedish law stipulates a progressive tax rate for salaries, with a tax rate of 30% up to 50 000 EUR and 50% of exceeding amount. Calculate total tax if Sweden provides for an ordinary credit, using the overall principle.

Alt1: Paid foreign taxes Credit alt 1: 26 000 Alt 2 Maximum credit Credit alt2: using the formula: 28 000 Since paid taxes are smaller than the maximum credit, you get a credit of your actual foreign taxes. Total tax: 40 000

You have worked in Sweden (Home State) as well as in state X and state Y. You have earned salaries of 30 000 EUR (Sweden), 30 000 EUR (State X) and 40 000 in State Y, resulting taxes of 6000 EUR in State X and 20 000 EUR in State Y. Swedish law stipulates a progressive tax rate for salaries, with a tax rate of 30% up to 50 000 EUR and 50% of exceeding amount. Calculate total tax if Sweden provides for exemption with progression.

Calculate Home state tax on WWI: 40000 EUR Calculating the exemption using the formula: 28 000 EUR. Total tax in Sweden: 40000-28000 = 12 000 Total tax: 12000+6000+20000 = 38 000

Overall principle

Different types and items of income from different countries blended together when calculating the maximum credit

What are the two main ways of relieving double taxation?

Foreign income can be exempt in Home State or Home State can provide for a foreign tax credit.

Two types of tax credits

Full credit and ordinary credit

Two types of tax exemption

Full exemption and exemption with progression.

Tax ecemption

Home state exempts foreign income, may require that income has actually been taxed in another state. Different versions: exemption and exemption with progression.

Tax credit

Home state provides for a tax credit equal to paid foreign taxes. Different versions: may or may not exceed tax levled in the Home State, overall principle, per type, per country or per item.

Full credit

Home state tax minus source state tax. More credit than Home State tax is possible.

Per item

Maximum credit calculated for each item of income. Interest from company X in state X, interest from company Y in state Y and royalties from company Z from state z etc. Does not allow for mixing of items of income associated with different levels of taxation in Source State.

Per country

Maximum credit calculated for each source country. Income state X, state Y etc. Mixing of different types of income possible, as long as income is sourced from same country.

Per income type

Maximum credit calculated for each type of income. Dividends, interest, royalties, business profits. Sometimes divided into only two categories, active and passive income.

Ordinary credit

No more credit than Home State tax possible. Maximum credit = (FI/TI) x Home state tax on TI. There are different versions and approaches.

permanent establishment

Non-resident companies can carry on businesses in another state through a permanent establishment. Business profits of PE are taxed in the source state.

You have worked in Sweden (Home State) as well as in state X and state Y. You have earned salaries of 30 000 EUR (Sweden), 30 000 EUR (State X) and 40 000 in State Y, resulting taxes of 6000 EUR in State X and 20 000 EUR in State Y. Swedish law stipulates a progressive tax rate for salaries, with a tax rate of 30% up to 50 000 EUR and 50% of exceeding amount. Calculate total tax if Sweden provides for a full credit.

Relief: 20 000 + 6000= 26000 Total tax: 40000+6000+20000-26000= 40 000

International juridical double taxation

Resident companies are taxed on their worldwide income. Non-resident companies are taxed on their sourced income. Results in double taxation of business income in the Source State.

Where are PEs taxed?

Source state (the state where PE is)

You have worked in Sweden (Home State) as well as in state X and state Y. You have earned salaries of 30 000 EUR (Sweden), 30 000 EUR (State X) and 40 000 in State Y, resulting taxes of 6000 EUR in State X and 20 000 EUR in State Y. Swedish law stipulates a progressive tax rate for salaries, with a tax rate of 30% up to 50 000 EUR and 50% of exceeding amount. Calculate total tax if Sweden provides for an ordinary credit using the per country approach.

State X Alt 1: 6000 Alt 2: 12 000 (formula) Use alt 1. State Y Alt 1: 20 000 Alt 2: 16 000 Use alt 2 since alt 1 exceeds the maximum. Total tax in Sweden: 40 000-6000-16000=18000 Total tax: 44 000 EUR

source taxation

Taxation of worldwide income meets source taxation. Withholding taxes on dividends, royalties, interests etc. Corporate income tax on P.E. profits.

economic double taxation vs international juridical double taxation

The same economic activity is taxed twice (different taxpayers) vs the same income is taxed in two different jurisdictions in the hands of the same person.