What is one purpose of a tax treaty?

A key purpose of a tax treaty is to avoid double taxation on specific types of income. Many countries enter into tax treaties to establish how income, such as dividends, interest, and royalties, will be taxed when it is earned by residents of one country but sourced from another. These agreements help clarify which country has taxing rights over particular income types and often provide reduced tax rates or exemptions to prevent an individual or entity from being taxed on the same income by both countries.

By alleviating the burden of double taxation, tax treaties encourage cross-border trade and investment, as individuals and businesses are more likely to engage in international transactions if they know they won’t be taxed multiple times on the same earnings. This also fosters stronger economic ties between the countries involved, as it creates a more predictable and attractive tax environment. In essence, tax treaties play a crucial role in international taxation and economic relations.