Clients often ask us: “Can I avoid double taxation?” To answer that, we clarify what “double taxation” is, when it arises, and what you can do about it.
Double taxation occurs when the same income is taxed twice, either in two different jurisdictions (e.g., two countries) or within the same jurisdiction at various levels (national & local).
Broadly, there are two types of double taxation.
- Domestic (within one country)
This occurs when the same income is taxed by different taxes within one state, such as a national tax & a local/state tax. A clear example is the U.S., where corporations pay income tax at both the federal level & the state level. Strictly speaking, this is not considered double taxation in law. Although the tax base (the company’s income) remains the same, rates are levied by different authorities and paid into different budgets, each acting within its respective powers. The system anticipates this outcome. You generally cannot “avoid” paying both, though tax planning and legal structuring can mitigate the overall burden across levels.
People also sometimes refer to it as “double taxation” when profits are taxed at the company level and again when they are distributed to owners. Legally, these are different taxes paid by different taxpayers (a legal entity & an individual), so it is not double taxation in the formal sense.
- International (between two countries)
This occurs when a resident of one country earns income in another and both countries claim the right to tax that income.
. Such cases are addressed bydouble tax treaties (DTTs)Bilateral agreements often prevent the same income from being taxed twice.
How do double tax treaties work?
First, treaties set tie-breaker rules for tax residency. Second, they allocate taxing rights by income type and prescribe relief mechanisms such as tax credits or exemptions to eliminate double taxation. Treaties may also reduce withholding tax rates on specific payments.
Not all taxes and charges are covered. Items often outside the treaty scope include special levies, excise duties, customs duties, and indirect taxes (such as VAT/Sales Tax).
To apply a treaty, you may need additional documents (e.g., a certificate of tax residence) or specific forms.
A Romanian tax resident owns a Polish company, and receives dividends. Both Poland & Romania tax dividends.
The Romanian resident may, under Article 10, pay only 15% in Poland. In Romania, those dividends are not taxed again (they are only reported). Additionally, a health contribution may be applicable under Romanian law, depending on the overall income.
Without a treaty, the shareholder could be liable for 19% PIT in Poland and an additional 10% in Romania.
Double taxation of income for sole proprietors
However, tax treaties do not always help avoid double taxation. Let’s look at two examples.
A common situation: Ukrainian residents who have moved permanently to European countries continue to work as Ukrainian sole proprietors (FOP). The problem is that FOP status is available only to Ukrainian residents; at the same time, if an individual has a permanent place of residence in another country, they may be considered its tax resident. This leads to the obligation to pay taxes as a sole proprietor in Ukraine and personal income tax in another country — effectively double taxation.
Why doesn’t the treaty help in such cases?
However, living in another country for more than 183 days does not always determine tax residency. In practice, there are cases where a Ukrainian FOP remains a tax resident of Ukraine only, even while living abroad for most of the year. This allowed income to be taxed solely under the Ukrainian single tax. To understand your specific obligations,
However, living in another country for more than 183 days does not always determine tax residency. In practice, there are cases where a Ukrainian FOP remains a tax resident of Ukraine only, even while living abroad for most of the year. This allowed income to be taxed solely under the Ukrainian single tax. To understand your specific obligations, we recommend consulting our team.
In some instances, it is possible to prove that the Ukrainian single tax is an “equivalent of income tax,” but this depends on the wording of the specific treaty and the position of the tax authority; such cases are sporadic.
Double taxation of income for U.S. LLC owners
Another typical example involves owners of American LLCs and the taxation of income received from foreign sources.
This situation is similar to the previous one. The point is that the LLC structure in the U.S. is a pass-through entity, which in many ways resembles the Ukrainian sole proprietor (FOP) system. This means the legal entity itself does not pay dividends to the owner. In practice, this creates a problem: it becomes impossible to obtain an official document confirming that income tax was paid in the U.S. Without such a certificate, the Ukrainian tax authorities will not recognize the tax paid abroad. As a result, the LLC owner is required to pay income tax in Ukraine on foreign income (18%) and the military levy.
Frequently asked questions on Double Taxation
It’s when the same income is taxed twice. There’s domestic double taxation (within one country at different levels) and international double taxation (two countries claim the same income).
They determine which country taxes a given income type and allow foreign tax credit or exemption methods (and sometimes lower withholding rates) to relieve double taxation.
No. Treaties generally cover income & capital gains taxes. VAT, local taxes, social contributions, and various fees may remain outside their scope. Some income, such as CFC inclusions, is taxed under domestic rules despite the presence of a treaty. If countries classify the same payment differently, the income may still be taxed twice.
Treaties do not always eliminate double taxation: Treaties typically cover income & capital gains taxes, but not other types of taxes. VAT, local taxes, social contributions, and licensing/administrative/sectoral fees may fall outside the treaty. Some income is still taxed under domestic anti-avoidance rules, e.g., Controlled Foreign Company (CFC) rules, even if a treaty exists. Character mismatch: if countries classify the same payment differently (e.g., as dividends in one and another category in the other), the same income can still be taxed twice.
CFC regimes tax the undistributed profits of a controlled foreign company in the controlling party’s country of residence. Treaties do not override this, but credits/exemptions typically exist to prevent the same amount from being taxed twice.
Double taxation is not a foregone conclusion, it’s often a result of not knowing how the rules interact. Treaties provide tools to prevent being taxed twice, but you must apply them correctly: confirm your tax residency, identify the income type, and check the relevant treaty provisions. With the rules mapped, you can avoid unnecessary costs and plan transparently and lawfully. When in doubt, seek advice, as facts & details matter.
