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A tax treaty is an agreement between two countries that sets out the rules for how individuals and businesses are taxed when they have income in both countries. These treaties are designed to prevent double taxation, which is when the same income is taxed in both countries. They also aim to promote economic cooperation and prevent tax evasion.
When a tax treaty is in place, it determines which country has the primary right to tax certain types of income. This can include income from employment, dividends, interest, and royalties. The treaty also outlines the methods for resolving disputes between the two countries and provides for the exchange of information between tax authorities.
Understanding tax treaties is important for individuals and businesses operating in multiple countries. It can impact their tax liability, the amount of taxes they owe, and their overall financial planning. It is essential to consult a tax professional or refer to the specific tax treaty between the countries in question to ensure compliance and avoid any potential issues with tax authorities.
