What is a double taxation treaty?

A double taxation treaty (DTT), also called a double tax agreement (DTA), is a bilateral agreement between two countries that ensures individuals and companies are not taxed twice on the same income.

Most commonly, these treaties apply to:

1. business profits;
2. dividends;
3. interest and royalties;
4. employment income;
5. pensions.
   

For companies operating internationally, DTTs specify which country has the primary taxing rights, and how income should be taxed or exempted in the other country. Some treaties offer full exemption in one country, while others grant a tax credit to offset what you’ve paid abroad.

How DTTs affect your business

If your company is active in more than one country through clients, subsidiaries, employees, or remote operations DTTs can directly influence your:

1. corporate tax liability;
2. withholding taxes on dividends, royalties, or interest;
3. personal income tax (for founders or remote workers);
4. transfer pricing rules and reporting requirements;
5. PE (Permanent Establishment) risks.
   

Ignoring these treaties may lead to double taxation, surprise audits, or withheld funds from partners or payment providers.

Common business scenarios

Let’s break this down with a few real-world examples.

1. Founder lives in Germany, company registered in Estonia

Estonia and Germany have a DTT in place. While Estonia has a 0% tax on undistributed corporate profits, Germany can potentially claim taxes on dividends or director’s income unless the income is declared properly and the treaty is applied.

Solution. Register for a Certificate of Tax Residence in Estonia and apply the treaty articles when paying yourself to reduce or eliminate German taxation.

2. A Cyprus company pays royalties to a UK consultant

Without a DTT, Cyprus would normally apply a 10% withholding tax. But the UK–Cyprus treaty sets a 0% rate on royalties, provided the proper forms are submitted in advance. Failing to use the DTT would mean losing 10% of every invoice to unnecessary tax.

3. A Polish software company invoices German clients

This is a case of business profits, which under most DTTs are taxed only in the country where the company is established unless the business has a Permanent Establishment (PE) in the other country.

If your team or office is physically based in Germany, you may trigger PE status and Germany may require corporate tax filings there.

Accessing DTT benefits: what’s required

Double taxation treaties don’t apply automatically. To benefit, you usually need to:

1. prove tax residency of your company (or yourself);
2. submit treaty claim forms to the tax authority or withholding party;
3. track income types (dividends, interest, services, etc.) separately
4. comply with substance requirements especially in low-tax jurisdictions.

Many countries now require economic substance to prove that your company is genuinely operating from the country where it claims tax residency. This can include:

1. local directors or management;
2. business premises or virtual office;
3. local payroll or contractors;
4. real decision-making occurring within the jurisdiction.
   

Without substance, treaty benefits may be denied under anti-abuse clauses.

Withholding taxes and how DTTs help

One of the most direct applications of DTTs is the reduction of withholding taxes on payments across borders.

Let’s say France withholds 30% tax on dividends paid to a non-resident. But under the France–Malta treaty, the withholding rate drops to 5% (or even 0%) if conditions are met.

This difference can save companies tens of thousands of euros in retained profits especially when repatriating earnings from subsidiaries or issuing royalties to IP-holding companies.

That’s why many international groups use DTTs as part of their group structuring strategy, combining holding companies, operating subsidiaries, and licensing vehicles across Europe.

Risks and misconceptions

While DTTs are powerful tools, they’re also misunderstood and misused often resulting in compliance issues.

Common mistakes include:

• assuming a treaty applies without proper paperwork;
• claiming treaty benefits without substance;
• ignoring CFC (Controlled Foreign Company) rules in your home country;
• misclassifying income (e.g., mixing royalties and services).
  

Another common risk is mismatched tax years or reporting standards, which can result in audits or denied treaty relief.

How to use DTTs effectively

To get the most out of DTTs, follow these steps.

1. Identify applicable treaties

Use the OECD database or your local tax authority’s portal to find the treaties between your country of residence and the country where your business is registered.

2. Check specific provisions

Don’t assume all DTTs are the same. Some offer 0% withholding; others reduce it to 5–15%. Some define PE more broadly than others.

3. Obtain a Certificate of Tax Residence

This is often required to claim treaty benefits. Most EU countries issue it annually.

4. Structure your business to meet substance and transparency standards

Shell companies are no longer tolerated especially in jurisdictions like Cyprus, Malta, or Estonia. You’ll need a clear structure, local advisors, and documented business activity.

5. Work with local advisors on both sides

Tax planning across two countries is never one-sided. You’ll need coordinated advice to avoid triggering tax in both states or losing deductions.

Double taxation treaties are not just paperwork. They’re a key part of any international business strategy. If used correctly, they protect your earnings, improve your tax efficiency, and allow you to operate cross-border with confidence.

But with more scrutiny from tax authorities and tougher substance rules, relying on outdated strategies or assumptions can do more harm than good.

The smart move? Build your structure deliberately, document your activity, and work with a team that understands both the letter and the spirit of the law.

If you’re building across borders, let’s talk.

Our approach at Manimama Law Firm

At Manimama, we support founders and businesses with:

• treaty-based tax planning
• cross-border structuring of holding and operating companies
• withholding tax reduction strategies
• substance setup and ongoing compliance
• residency certificates and treaty filings
  

Whether you’re optimizing your dividend flows, setting up a licensing model, or just trying to avoid double taxation on remote income we’ll help you build a tax strategy that works in the real world.

Our contacts

If you want to become our client or partner, feel free to contact us at support@manimama.eu.

Or use our telegram @manimama_sales and we will respond to your inquiry.

We also invite you to visit our website: https://manimama.eu/.

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The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.