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UK-Cayman Islands Double Taxation Arrangement (DTA)

Published by Shailesh Sapkota
Posted Date: June 20, 2024 , Modified Date: July 10, 2024

On the 15th of June 2009, the governments of the United Kingdom and Cayman Islands signed the pivotal arrangement, namely, the Double Taxation Arrangement (DTA). This arrangement came into force on the 20th of December 2010.

This article aims to provide an overview of these arrangements and to delineate their primary implications.

Scope and Application

The first two articles in the Arrangement outline the scope and applicability of its provisions, detailing the persons and types of taxes it covers. Specifically, they define who is affected by the Arrangement and the various taxes that fall under its guidelines.

Article 1: Persons Covered

This arrangement, signed between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Cayman Islands, is designed to address the issue of double taxation concerning taxes on income. It primarily focuses on individuals who are residents of either or both territories.

Article 2: Taxes Covered

The scope of this arrangement extends to taxes on income and on capital imposed on behalf of a territory, irrespective of the way they are levied. It includes all taxes on total income or parts of income, such as gains from selling movable or immovable property.

Specifically, the taxes covered are income tax, corporation tax, capital gains tax, inheritance tax and value added tax ("United Kingdom taxes") in the United Kingdom. The Arrangement also extends to any similar taxes introduced after its signing, whether they replace or supplement the existing taxes. The tax authorities of both territories will notify each other of any major changes in their tax laws.

Article 3: General Definitions

This article provides crucial definitions for interpreting the arrangement:

  • It defines “United Kingdom” to mean Great Britain and Northern Ireland and the areas beyond the territorial sea, over which they exercise sovereign rights or jurisdiction in accordance with their domestic law and international law.
  • “Cayman Island” refers to the territory of Cayman Island and the territorial sea adjacent thereto in accordance with international law.
  • “A territory” and “the other territory” mean Cayman Island or the United Kingdom, based on the context.
  • “Person” includes an individual, a company or any other body of persons.
  • “Company” refers to any body corporate or any entity that is treated as a body corporate for tax purposes.
  • “Enterprise” applies to the carrying on of any business.
  • “Enterprise of a territory” and “enterprise of the other territory” refer respectively to an enterprise carried on by a resident of a territory and an enterprise carried on by a resident of the other territory.
  • The term “international traffic” means any transport by a ship or aircraft,
  • “Competent authority" is designated as the Commissioners for Her Majesty’s Revenue and Customs in the United Kingdom and the Commissioner of Income Tax in Cayman Island or their respective authorised representatives.

It's also noted that any undefined terms within the arrangement should be interpreted based on their meanings in the domestic tax laws of the respective party, with the tax laws taking precedence over other laws.

Residency Status

Article 4: Resident

This arrangement refers to the “resident of territory” as the person who, under the laws of that territory, is liable to tax therein by reason of his domicile, residence, place of management or incorporation, or any criterion of a similar nature. However, it excludes those who is liable to tax in that territory in respect of only income or capital gains from sources in that territory.

Whereby if an individual is a resident of both territories, the person will be considered a resident of the United Kingdom only.

Those individuals to whom the above provision applies will not face more stringent taxation in the United Kingdom than residents in similar circumstances who are not covered by the above provision.

Specific Tax Provisions

Article 5: Business Profits of Individuals

The applicability of tax on the business profits of an individual is explored in Article 5 of the Arrangement. As per Article 5, such profits shall be taxable only in that territory where the individual is resident unless he undertakes the business in the other territory. However, if the business is being carried on in the other territory, the profits may be taxed in that other territory.

Business Profits of Individuals

For individuals determining their business profits, they can deduct expenses incurred for their business purposes, encompassing executive and general administrative expenses, whether within the Territory where the business operates or elsewhere.

No provision of this article shall be construed as restricting the right of a Territory to tax its residents.

Article 6: Profits and Gains from Shipping and Air Transport

Article 6 addresses the taxation of an enterprise's earnings on international shipping and air transport.

Such profits of an enterprise are only taxable in the territory in which the income is generated.

Profits made by a resident from selling ships or aircraft operated in international traffic by an enterprise of that territory or movable property pertaining to the operation of such ships or aircraft are taxable solely in that Territory.

This provision also applies to profits from the participation in a pool, a joint business or an international operating agency.

Article 7: Pensions

This article clarifies the tax treatment of pensions and similar remuneration. Essentially, such payments received by residents and arising in a territory may be taxed in that respective territory.

Notwithstanding the provision above, if an individual has not been a continuous resident of the first territory for either six years before the pension payment begins or six years before the related employment starts, in those cases, such pension payments arising in the other territory may also be taxable in that other territory.

Article 8: Government Service

Article 8 covers the taxation on income paid by governments or related authorities to the individuals.

Salaries, wages, and similar payments (excluding pensions) paid by a territory or its political subdivisions to individuals for services rendered are taxable only in that territory. However, if the services are rendered in the other territory and the individual is a resident there (not solely for the service purpose), then the payments are taxable only in that other territory.

Government service Double Taxation Arrangement

Notwithstanding the provision above, pensions and other similar remuneration paid by a territory or its political subdivisions to individuals for services rendered are taxable only in that territory. However, if an individual is a resident of other territory and has been continuously so for either six years before the pension payment begins or six years before the related employment starts, in those cases, such pension payments are only taxable in the other territory.

This paragraph does not apply to such payments in connection with a business carried on by a territory or its political subdivisions.

Article 9: Students

Payments received by a student or business apprentice for the purpose of education and training are exempt from taxes in the Territory where they are studying if they were a resident of the other Territory and the payments come from outside the Territory where they are studying. The exemption from tax provided by this Paragraph shall apply to a business apprentice only for a period of time not exceeding one year from the date he first arrives in the first-mentioned Territory for the purpose of his training.

Article 10: Other Income

Article 10 of the Arrangement document specifies that income not dealt with in the previous articles will be covered by this provision.

Items of income not dealt with in the foregoing Paragraphs of this Arrangement arising in a Territory and paid to a resident of the other Territory may be taxed in the first-mentioned Territory.

Article 11: Elimination of Double Taxation

The primary reason for the Double Taxation Arrangement (DTA) is to make sure that individuals are not taxed in two separate territories. Article 11 of the Arrangement explains how this is worked out in both of the territories.

According to the agreement, when a resident of a territory earns income taxable in other territory, the first-mentioned territory should allow a deduction from the resident’s income tax equal to the tax paid in the other territory. This deduction, however, should not surpass the portion of tax attributable to the income, profits or gains taxable in the other territory, computed before the deduction is applied.

In accordance with the arrangement, profits, income and gains received by a resident of a territory which may be taxed in the other territory should arise from sources in that other territory.

Article 12: Mutual Agreement Procedure

Article 12 of the arrangement outlines the Mutual Arrangement Procedure (MAP) for resolving taxation disputes between the involved territories. Unresolved cases are decided via arbitration between the competent authorities, provided that the cases are presented in time.

If a person believes they are facing taxation contrary to the arrangement's provisions, they can present their case to either Territory's competent authority by passing domestic legal remedies.

Competent authorities will seek mutual arrangements to resolve justified objections and prevent taxation contrary to the Arrangement. Arrangements will override domestic legal limitations, except those necessary for implementation. They will also collaborate to resolve interpretation issues and may consult on cases of double taxation not covered by the Arrangement.

The territories’ authorities can communicate directly to reach arrangements as outlined earlier.

Article 13: Exchange of Information and Tax Examinations

The necessity to exchange the information in between the competent authorities of two territories (defined in Article 3) is addressed in Article 13 of the Double Taxation Arrangement (DTA).

The competent authorities of the Territories are required to exchange pertinent information to enforce tax laws in line with the Arrangement. Information shared must be treated confidentially, similar to how domestic law treats such information, and should only be disclosed to parties involved in tax-related matters. While this information may be used for other tax purposes with explicit consent or in accordance with both Territories' laws, provided the authority that shared the information agrees, it cannot be disclosed to any other jurisdiction.

double taxation arrangement

Territories are not compelled to undertake actions that contradict their laws or administrative practices, reveal inaccessible information, or expose trade secrets. If one Territory requests information, the other must obtain it, even if not required domestically, subject to certain limitations to prevent refusals based solely on a lack of domestic interest. These limitations do not permit a Territory to decline information solely because it's held by financial institutions or concerns ownership interests. Additionally, Territories may allow representatives of the other Territory's competent authority to conduct interviews, examine records, or perform tax examinations within their jurisdiction, following agreed procedures and local laws.

Article 14: Entry to Force

Article 15 outlines the procedures for the Arrangement's entry into force and its effective date.

Each territory will inform the other via diplomatic channels when their respective legal procedures for enacting this Arrangement are complete. The Arrangement will come into force on the later date of these notifications and will have the following effects:

In the United Kingdom:

  • Income Tax and Capital Gains Tax: Affects the assessment year starting on or after April 6 following the Arrangement’s entry to force.
  • Corporation Tax: Affects the financial year starting on or after April 1 following the Arrangement’s entry to force.
  • Other Taxes: Affects the charges to tax arising on or after the Arrangement’s entry to force.

In the Cayman Islands: on those same dates

Article 15: Termination

Article 15 addresses the termination of the Arrangement.

As the Arrangement has already commenced, the Arrangement will stay in effect until one of the Territories decides to terminate it. Either Territory can end the Arrangement by giving notice to other government on or before 30th June in any calendar year. This arrangement will cease to have effect:

Relation to relief from double taxation: After the end of the assessment or financial year following the receipt of notice.

Relation to other matters: After the date of receipt of notice.

Conclusion

The Tax Information Exchange Arrangement and the Double Taxation Arrangement (DTA) between the UK and the Cayman Islands is a significant step in fostering a transparent and cooperative fiscal relationship between the two territories.

This not only streamlines the tax obligations for residents but also encourages trade and investment, given the clarity on tax liabilities.

As international fiscal landscapes evolve, such arrangements will continue to play a vital role in navigating the complex realm of global taxation.

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Shailesh Sapkota
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