Tax Treaty
Definition
A bilateral agreement between two countries that determines how income earned by residents of one country in the other is taxed. Tax treaties prevent double taxation, reduce withholding rates on dividends, interest, and royalties, and establish rules for which country has the primary right to tax certain types of income. The U.S. has tax treaties with over 60 countries. Treaty benefits must be claimed on your tax return; they are not applied automatically.
Example
Under the U.S.-UK tax treaty, a U.S. resident receiving UK dividends may face a reduced withholding rate of 15% instead of the standard UK rate. The U.S. resident then claims a foreign tax credit for the UK tax paid.
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