What double taxation relief is
Double taxation relief removes the second tax when 2 countries tax the same income in the hands of the same person. The usual case is a resident of 1 country earning income in another, with both taxing it, which the OECD calls juridical double taxation (OECD Model, commentary on Articles 23 A and 23 B, paragraphs 1 to 3).
A tax treaty between the 2 countries handles it in 2 stages. Its income articles decide which country may tax each kind of income and cap what the source country can take; Article 23 then obliges your country of residence to relieve whatever tax the source country was still allowed to charge.
When both countries claim you as a resident, the treaty's Article 4 first picks 1 of them, which turns dual tax residency into an ordinary residence-and-source case (commentary paragraph 4). Tax on a company's profit and then on your dividend from it is economic double taxation of 2 taxpayers, which Article 23 does not cover (paragraph 2).
Relief comes from the treaty or from your residence country's own law, called unilateral relief, which works with no treaty at all. Treaties use 1 of 2 principles, exempting the foreign income or crediting the foreign tax, and the Model offers 1 version of each for countries to choose from or combine (OECD commentary, paragraphs 12 to 17 and 28 to 31). Domestic law can also let you deduct the foreign tax as an expense instead, as the US does (IRS).
The 4 methods of double taxation relief described in the OECD commentary
| Method | What your country of residence does | In the OECD Model |
|---|---|---|
| Full exemption | Leaves the foreign income out and taxes the rest at the rate for the rest alone | No |
| Exemption with progression | Leaves the foreign income out but taxes the rest at the rate for your total income | Yes, Article 23 A |
| Full credit | Taxes all your income and deducts all the foreign tax | No |
| Ordinary credit | Taxes all your income and deducts the foreign tax, up to its own tax on that income | Yes, Article 23 B |
The exemption method: Article 23 A
Under Article 23 A, your country of residence exempts income that the treaty allows the other country to tax. It looks at income, not tax: the exemption applies whether or not the other country actually uses its right, so your home tax office does not have to check what you paid there (commentary paragraphs 17 and 34).
Your country of residence can still count the exempt income when it sets the rate on the rest of your income. Article 23 A(3) allows this exemption with progression, and most treaties between OECD countries that use exemption keep it (commentary paragraph 55). Under progressive rates, a foreign salary can push your home income into a higher bracket even though the salary itself is not taxed.
Exempt income still goes on your return
In a country that exempts with progression, foreign salary or business profit that the treaty exempts is still declared, because the tax office needs it to set the rate on your other income. Leave it off and the rate on everything else comes out too low, and the tax office can reassess the difference.
Article 23 A also keeps the exemption from leaving income taxed too lightly or not at all:
- Dividends and interest get a credit. Where the source country may only take a capped share, as with dividend withholding tax, even an exemption country taxes the income and credits the tax withheld, up to its own tax on it (OECD Model, Article 23 A(2)).
- The switch-over rule. Paragraph 4 turns the exemption off where the source country applies the treaty to exempt the income itself or to cap its tax on dividends or interest, so a disagreement between the 2 countries cannot leave the income untaxed in both (commentary paragraph 56.1).
- Subject-to-tax clauses. A treaty can make the exemption depend on the source country actually taxing the income, an exception the commentary allows where the source country's law taxes nothing or the tax was never collected (paragraph 35).
Germany is a typical exemption country. Where a treaty exists it usually exempts the foreign income with progression, and it credits foreign tax only where the treaty provides for a credit or there is no treaty, never above the German tax on that income, PwC reports.
The credit method: Article 23 B
Under Article 23 B, your country of residence taxes all your income, the foreign part included, and deducts the tax paid in the other country. The deduction stops at the part of its own tax that falls on that income, a cap the OECD calls the maximum deduction, which makes it an ordinary credit rather than a full credit (commentary paragraphs 16 and 57).
The cap is why a credit leaves you paying the higher of the 2 rates. Foreign tax below your home tax on that income is topped up at home, so you pay as if you had earned everything at home; foreign tax above it is never refunded by your home country (commentary paragraphs 25 and 27).
How much foreign tax you can actually credit depends on which tax counts and how your country measures the cap:
- Only the treaty rate counts. Tax withheld above the treaty rate is not creditable and has to be reclaimed from the source country, as the IRS states for US taxpayers.
- The cap uses net income. The maximum deduction is usually worked out on the foreign income after its related costs, so it can fall below the tax taken on the gross amount (commentary paragraph 63).
- Per item, per country or pooled. The cap can be worked out item by item, country by country, or on all foreign income and tax pooled under 1 overall limit, and domestic law decides which (paragraphs 64 to 66).
Claiming the credit for tax withheld abroad
Treaty rate claimed at source
Your loan to a company abroad pays $20,000 of interest. You give the payer proof of residence before the payment, it withholds the 10% treaty rate, $2,000, and your country of residence credits all $2,000 against its own, higher tax on the interest.
Domestic rate withheld
No proof on file, so the payer withholds its 25% domestic rate, $5,000. Your country of residence credits only the $2,000 the treaty allowed, and the other $3,000 comes back only if you file a refund claim in the source country.
Credit vs exemption in figures: the OECD's worked example
The OECD's commentary runs every method on the same income: 100,000 in total, 80,000 earned in the residence country and 20,000 in the source country, with a residence-country rate of 35% on 100,000 and 30% on 80,000, and a source-country rate of either 20% or 40% (OECD Model, commentary paragraph 18).
With no relief, the total would be 39,000 at a 20% source rate and 43,000 at 40%, against 35,000 if all 100,000 had been earned at home (paragraph 19).
- Tax at home
- Tax in the source country
Show the numbers
| Tax at home | Tax in the source country | Total | |
|---|---|---|---|
| No relief, source 20% | 35,000 | 4,000 | 39,000 |
| Full exemption, source 20% | 24,000 | 4,000 | 28,000 |
| Exemption with progression, source 20% | 28,000 | 4,000 | 32,000 |
| Ordinary credit, source 20% | 31,000 | 4,000 | 35,000 |
| No relief, source 40% | 35,000 | 8,000 | 43,000 |
| Full exemption, source 40% | 24,000 | 8,000 | 32,000 |
| Exemption with progression, source 40% | 28,000 | 8,000 | 36,000 |
| Ordinary credit, source 40% | 28,000 | 8,000 | 36,000 |
Under exemption with progression, the residence country taxes 80,000 at the 35% rate for total income, which is 28,000, so the total is 32,000 or 36,000; it gives up 7,000 whatever the source country charges (paragraphs 20 and 21).
Under the ordinary credit, it taxes all 100,000 at 35% and deducts the foreign tax up to 7,000, its own tax on the 20,000 (paragraph 23). At a 20% source rate the full 4,000 is credited and the total stays 35,000; at 40% only 7,000 of the 8,000 is credited, and the total is 36,000 (table 23-1).
Full exemption is the most generous: taxing 80,000 at the 30% rate for 80,000 gives up 11,000, more than the source country took even at 40%, because it also lowers the rate on income earned at home (paragraph 22).
Relief without a treaty: unilateral relief
Where no treaty applies, relief comes from your residence country's own law. The UK gives Foreign Tax Credit Relief and usually gives it even without an agreement, unless the foreign tax does not correspond to UK income tax or capital gains tax, and you get back less if the UK would have taxed the income at a lower rate (GOV.UK).
The US credit also comes from its own law and covers taxes paid to a foreign country or a US possession, though only income, war profits and excess profits taxes qualify, so a foreign VAT does not (IRS). The US foreign tax credit is claimed on Form 1116.
The credit is capped at your US tax multiplied by your foreign taxable income over your total taxable income, and foreign tax above the cap can be carried back 1 year and forward 10 (IRS).
| Taxable income, all sources | $100,000 |
|---|---|
| Of which foreign: salary for work done abroad | $40,000 |
| US tax before the credit (single filer, 2026 brackets)10%, 12% and 22% brackets | $16,712 |
| Credit limit: $16,712 × 40,000 ÷ 100,000 | $6,685 |
| Foreign tax paid on the salary | $12,000 |
| Unused foreign taxCarry back 1 year or forward up to 10 years | $5,315 |
| US tax still due | $10,027 |
The cap and the carry periods follow the IRS, the brackets the IRS 2026 inflation adjustments; the income and the foreign tax are illustrative.
Some countries relieve foreign income by not taxing it at all. A territorial tax system leaves foreign income out of the tax base, and non-dom regimes such as Malta's tax a non-domiciled resident's foreign income only when it is received in Malta, with a minimum tax of €5,000 (about $5,690) a year once the foreign income left outside Malta reaches €35,000 (about $39,800) (Income Tax Act, articles 4(1) and 56(27)). Foreign income that these systems leave untaxed needs no relief at home, but work done inside the country is local income there.
Which relief method is better for you
Exemption with progression costs you less when the source country taxes the income below what your country of residence would charge on it; when the source country charges more, the 2 Model methods give the same total (OECD commentary, paragraphs 21, 25 and 27).
Ordinary credit vs exemption with progression, case by case
| Your situation | Ordinary credit (Article 23 B) | Exemption with progression (Article 23 A) |
|---|---|---|
| The source country taxes the income less than your home country would | You pay up to your home rate: the gap is due at home | You keep the lower source-country tax; the income still lifts the rate on the rest |
| The source country taxes it more | The excess is not refunded | Same total as the credit |
| The source country's own law does not tax it | Your home country taxes it in full | Exempt anyway, unless the treaty has a subject-to-tax clause |
| Dividends and interest | Credit up to your home tax | Credit up to your home tax, under Article 23 A(2) |
So the method matters most when you live in a high-tax country and earn in a lower-tax one, as with a salary for work abroad or rent from property there.
Picking a residence country whose treaty exempts income from your former home country, rather than crediting it, is one of the legal ways to pay less tax when rent or business profit will keep arriving from there. Comparing what that income would cost in 2 or 3 candidate countries shows the gap at your own figures.
The reverse case gets nothing from either method. A flag theory plan that puts your residence in a low-tax country while your income is taxed at source in a high-tax one leaves the source tax as the final cost, because relief only ever reduces the residence country's own tax, and Article 23 B caps the credit at that tax.
US citizens face the same comparison in another form. The foreign earned income exclusion works like an exemption for earned income, up to $132,900 for 2026 (IRS), and no credit is allowed for tax on excluded income (IRS), so choosing between the exclusion and the credit turns on whether the foreign tax sits below or above the US tax on that income.
How to avoid double taxation, step by step
Relief is claimed in 2 places: at source, where the payer withholds at the treaty rate once it has proof of where you live, often a tax residency certificate from your new country, and at home, where your return claims the exemption or the credit.
Claiming double taxation relief
- Find which method the treaty's Article 23 gives your country of residence: an exemption, with a credit for dividends and interest, or a credit for all foreign tax.
- Claim the treaty rate at source before the payment, because tax withheld above it is not creditable at home.
- Keep proof of the foreign tax: payslips, withholding statements, and the foreign return with its assessment.
- Declare all foreign income on your home return, exempt income included, so the rate on the rest comes out right.
- Work out the credit cap on the foreign income net of its costs, item by item, country by country or pooled, as your country's law sets it.
- Record any foreign tax above the cap that your country lets you carry to other years.
David's note
When someone will still have income from their old country after a move, such as rent from a home they kept, I read Article 23 of the treaty before I compare headline rates. An exemption country leaves that rent at the old country's tax; a credit country tops it up to its own rate, and on a large rental income that top-up can outweigh the rate cut that made the move look attractive.
