Tax Treaty


DEFINITION of 'Tax Treaty'

A bilateral agreement made by two countries to resolve issues involving double taxation of passive and active income. Tax treaties generally determine the amount of tax that a country can apply to a taxpayer's income and wealth. Tax haven countries are the only countries that typically do not enter into tax treaties.


One of the most important aspects of a tax treaty is the policy on withholding taxes, which determines how much tax is levied on income (interest and dividends) from securities owned by a non-resident. For example, if a tax treaty between country A and country B determined that their bilateral withholding tax on dividends is 10%, then country A will tax dividend payments that are going to country B at a rate of 10% and vice versa.

  1. Passive Income

    Earnings an individual derives from a rental property, limited ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. IRS Publication 901

    A document published by the Internal Revenue Service (IRS) that ...
  4. Income Tax

    A tax that governments impose on financial income generated by ...
  5. Active Income

    Income for which services have been performed. This includes ...
  6. Withholding Tax

    1. Income tax withheld from employees' wages and paid directly ...
Related Articles
  1. Taxes

    Changes In Tax Legislation And Regulation

    Keeping on top of these amendments can help you avoid penalties and take advantage of benefits.
  2. Personal Finance

    Pros And Cons Of Offshore Investing

    Tax loopholes are shrinking, but there are still plenty of viable prospects. Get the big picture.
  3. Taxes

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  4. Investing

    Which GOP Candidate Brings What to the Table?

    What are the major GOP presidential candidates' economic plans and how do they differ?
  5. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  6. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  7. Economics

    Explaining Corporate Tax

    A corporate tax is a tax levied on the profits a corporation generates.
  8. Taxes

    The 5 Countries Without Income Taxes

    Discover information on some of the best countries to consider relocating to that offer the financial benefit of charging no income tax.
  9. Retirement

    How Much Can You Contribute to Your 401(k)?

    Given the fairly high compensation limits on these retirement plans, most workers can pitch in more than they currently do.
  10. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  1. Can the government tax your capital gains from other countries?

    Income earned by U.S. citizens is subject to taxation by the IRS regardless of where it was generated. The government of ... Read Full Answer >>
  2. Why is the Cayman Islands considered a tax haven?

    The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
  3. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  6. Why is Andorra considered a tax haven?

    Andorra is one of many locations around the globe considered a tax haven because of its relatively lenient tax laws. However, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!