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HMRC internal manual

Double Taxation Relief Manual

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HM Revenue & Customs
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Non-residents: UK income: Employments: Employment

The employment Article in our double taxation agreements is normally called the Dependent Personal Services Article. In most of the United Kingdom’s agreements the Article is based on Article 15 (Dependent Personal Services) of the OECD Model Convention (see DT153) and the terms of this Model Article are summarised below. It must, however, always be checked that the Article in the particular agreement with which you are concerned follows the OECD Model Article before reliance is placed upon the guidance below.

Paragraph (1) of the OECD Model Article sets out the general principle that salaries, wages and other similar remuneration may be taxed in the country where the employment giving rise to that remuneration is exercised.

The words `salaries, wages and other similar remuneration’ should be understood in the broadest sense as covering all income from an employment, including benefits and share option gains chargeable under ICTA88/S135 (see DT1925).

It follows from the terms of Paragraph (1) that, in general, an individual can be taxed onthe income arising from duties performed in the United Kingdom whether or not he is resident in the United Kingdom under our domestic law. Our double taxation agreements provide, however, that such income may, in certain circumstances, be exempted from UnitedKingdom tax.

Paragraph (2) of the OECD Model Article provides that, notwithstanding paragraph (1), employment income may, if certain conditions are fulfilled, be exempt from tax in the country where the employment is exercised. Consequently it is this paragraph which forms the basis of most claims for exemption from United Kingdom tax under this Article. To qualify for exemption, the taxpayer has to demonstrate that he is a resident of the other country for the purposes of the agreement (see DT310) and three further conditions, explained at DT1921 - DT1923 below, must all be met.

For years of assessment up to and including 1995-96, the taxpayer must strictly first establish that he is a resident of the agreement partner country (see DT310), but in the interest of early settlement of a claim you can begin to consider whether the conditions for relief under the employment Article are satisfied even where the issue of residence is unresolved. Where it is clear that the conditions of the employment Article itself are not fulfilled the exemption claim should be withdrawn and there may therefore be no need to pursue the issue of residence.

For years of assessment 1996-97 onwards, claims to exemption from UK tax in respect of employment income are made as part of the taxpayer’s self assessment on the claim form attached, depending on the circumstances, to either Help Sheet IR302 (Dual-Residents) or Help Sheet IR304 (Non-Residents - Relief under Double Taxation Agreements). Both forms require the taxpayer to establish the fact of his residence in the other country for the purpose of the agreement (see DT310) and to declare that the relevant provisions of the particular agreement are considered to have been fulfilled. All claims under Article 15(2) should be checked carefully by reference to terms of the agreement and, where appropriate,to the guidance at DT1921 - DT1923, and enquiries raised in suitable cases. See also DT1924 about certain types of cases which must always be referred to Employment Income Technical, before a claim is accepted.

Paragraph (3) of the OECD Model Article provides that, notwithstanding the other provisions of Article 15, remuneration in respect of an employment as a member of the crew or regular complement of a ship or aircraft in international traffic may, depending on the terms of the agreement, be taxed either in the State of residence of the employer or in the State in which the place of effective management of the enterprise is situated. Should such an employee be United Kingdom-resident, the foreign tax might be allowable as a credit against United Kingdom tax due on the same income under the Elimination of DoubleTaxation Article of the appropriate agreement.