Double Tax Treaties: the key to understanding where international income is truly taxed

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Double Taxation Agreements — commonly known as DTAs — are one of the cornerstones of international financial and commercial relations.
They are bilateral treaties that define how income should be taxed when a resident of one country earns income in another State.

They prevent the same income from being taxed twice and provide essential legal certainty for individuals and companies operating across borders.
They also resolve residence conflicts when they arise and make it possible for economic activity to extend beyond national borders.

🧩 Before we talk about DTAs: how are non-residents taxed?

Every country has a specific regime to tax individuals or entities that are not tax residents but earn income within its territory.
This regime is usually known as the “non-resident income tax” and shares common features worldwide.

If you want to explore the concept of tax residency, we recommend reading the article Tax residency in Andorra: requirements and real advantages, which explains the criteria most countries use.

Compared with resident taxation, non-resident regimes generally:

• do not distinguish between individuals and companies,
• apply flat rates to gross income, without expense deductions,
• and are often more burdensome than ordinary taxation.

In many countries, non-resident tax rates range between 20 % and 48 %, depending on the income type (dividends, interest, royalties, employment income, services…).

This is why DTAs are so important: they restrict and modify this taxation.
They also ensure that the same income cannot be taxed simultaneously in two jurisdictions.

➤ If you want to understand the basics of non-resident taxation in Andorra, see the article Non-Resident Income Tax (IRNR) in Andorra.

📘 What exactly do DTAs do?

DTAs are far more than a tool to avoid double taxation.
They create a structured framework that organises cross-border taxation, reduces conflicts, and provides stability for international taxpayers.
Their main functions can be summarised in four core pillars.

🛑 1. They cap taxation in the source country

When a resident of one country earns income in another State, that State may tax it under its domestic law.
A DTA, however, sets a maximum tax rate that the source State is allowed to apply.

This greatly reduces the tax burden.
For example, if domestic non-resident rules impose a 30 % withholding tax on dividends, a DTA may limit this to 5 % or 10 %.

🔍 2. They determine which country may tax each type of income

DTAs allocate taxing rights between both countries. Depending on the nature of the income:

• it may be taxable only in one country, or
• it may be taxable in both, but with limits in the source country.

The general rule is that the country of residence has the primary taxing rights and may tax “without limitation”.
The source State may apply only a reduced rate when authorised by the DTA.

Common examples:

• Income from immovable property is usually taxed where the property is located.
• Employment income and pensions are usually taxed in the country of residence.
• Dividends, interest, and royalties may be taxed in both countries, but with strict caps in the source State.

💸 3. They ensure that the same income is not taxed twice

Beyond limiting source taxation, DTAs require the country of residence to eliminate double taxation through:

• an exemption for foreign income, or
• a tax credit for tax paid in the other country.

This ensures that the same income is never taxed twice, even if part of it was already taxed in the source country.
These mechanisms usually appear as foreign tax credit relief.

In the source State, domestic personal income tax rules apply.
To learn how Andorra taxes personal income, see Personal Income Tax (IRPF) in Andorra.

🛡️ 4. They provide legal certainty and prevent treaty abuse

DTAs also include rules designed to ensure consistency and protect taxpayers:

• harmonised definitions of income categories such as salary, dividend, business profit, or royalty,
• tie-break rules to resolve dual-residence situations,
• anti-abuse clauses preventing improper use of the treaty,
• cooperation mechanisms between tax administrations (Mutual Agreement Procedure),
• a non-discrimination principle ensuring equal treatment of residents and non-residents.

Thanks to these provisions, a DTA becomes a stable and predictable instrument, essential for cross-border investment and professional mobility.

🏠 The most common income categories and how a DTA treats them

When analysing a DTA, income is usually grouped into familiar categories that make interpretation easier.

🏡 Income from immovable property

Income derived from real estate is always taxed in the country where the property is located.
DTAs almost never introduce exceptions to this rule.

If you want to understand how real-estate income is taxed, see Real-estate taxation in Andorra: complete guide to buying, renting and selling with confidence.

👔 Employment income and pensions

The general rule is that they are taxed in the country of residence of the employee or pensioner.
There are nuances (temporary assignments, government pensions, cross-border activity), but this is the prevailing approach.

🏢 Business profits

A State cannot tax the profits of a foreign company unless that company has a permanent establishment on its territory.
This rule is essential for digital businesses, international professionals, and start-ups operating across countries.

Do not confuse business profits with income earned by a company through unrelated activities: if no structured business activity exists in the State, the income receives a different tax treatment.

To learn more, see Corporate Income Tax in Andorra: rates, special regimes and tax deductions.

💶 Dividends, interest, and royalties

This is where DTAs have the most practical impact.
They cap withholding taxes in the source country, substantially reducing the tax cost for investors and businesses.

Important note:
Regardless of the source-country tax rate, the country of tax residence may impose additional tax, especially in systems based on worldwide income — which is the majority.
Depending on the recipient, these amounts may fall under personal income tax or corporate tax.

To explore this further, see Worldwide vs territorial taxation: essential differences and international implications.

To understand the treatment in Andorra, see How financial income is taxed in Andorra.

🧭 What happens if someone is considered “resident” in two countries?

It is not uncommon for an individual to meet the residence criteria of two countries at the same time — due to days spent, permanent home, family ties, or economic activity.
DTAs resolve these situations through tie-break rules, applied in this order:

• permanent home available,
• centre of vital interests,
• habitual abode,
• nationality,
• mutual agreement between the tax authorities.

This prevents dual residence and ensures consistent taxation.

For a detailed explanation, see Tax-residence conflicts: when two countries consider you a resident.

🌍 Why are DTAs so important internationally?

DTAs are a fundamental piece of economic policy:

• they facilitate foreign investment,
• bring legal certainty to businesses and private wealth,
• prevent tax disputes between countries,
• foster trade and international mobility.

Using the OECD Model Tax Convention allows countries to speak a common fiscal language.
To learn more about the organisation behind these standards, see The OECD: what it is, how it works, and why it shapes international taxation.

Countries like Spain and France have more than one hundred DTAs.
Andorra, despite having a more recent tax system, has made significant progress in the last decade.
To understand this development, see Evolution of Andorra’s tax framework.

🗺️ Which DTAs has Andorra signed?

Although Andorra implemented its tax system comparatively late, it has fully aligned with international standards and signed numerous DTAs.

You can review them all in the article Double Taxation Agreements (DTAs) in Andorra, where we outline the current network, new agreements, their implementation status, and key points for interpretation.

📞 Do you operate internationally and need to understand how a DTA affects you?

If you earn income in more than one country — dividends, salaries, professional services, real estate income, or pensions — applying a DTA correctly can be decisive.
It is not only a matter of tax treatment, but also of meeting the formal requirements essential for applying treaty benefits correctly.

Doubts are common when multiple jurisdictions are involved.
Many advisers have strong local knowledge but limited international expertise, which often complicates the analysis.
If you want to understand why, see Differences between manager, adviser and consultant: which does your business really need?

At ELYSIUM, we help you structure things correctly and optimise your international tax position.
You can contact us via our form, or book a confidential meeting at the bottom of the page.

Last updated: December 2025