If you own a property in another country, whether you rent it out or simply use it as a personal residence, you may have a tax obligation in that country. What many owners do not appreciate is that their home country may also seek to tax the same income. This is the double taxation problem, and without proper advice it is possible to pay more than is required — or to be non-compliant in one or both jurisdictions.

How tax on overseas property arises

Under international tax law, the country where your property is located holds primary taxing rights over income from that property, including rental income and disposal gains. This applies irrespective of whether the owner is resident in that country.

Separately, most countries tax their residents on worldwide income. An owner resident in Australia with a property in Spain is, in principle, assessable in both Spain and Australia on the same rental income.

What a double tax agreement does

A double tax agreement between two countries determines which has taxing rights and how double taxation is relieved. Two methods are common.

  • Credit method. Both countries tax the income, but the home country provides a credit for tax paid in the source country. The credit is capped at the home-country tax on the same income. Any excess foreign tax above that cap is not recoverable.
  • Exemption method. One country gives up its taxing rights entirely. Less common for property income, but present in some treaties.

Where no treaty exists, most countries provide unilateral domestic relief, though this is generally less comprehensive.

Properties that are not rented out

Most countries impose no ongoing income tax on unoccupied second homes. France, Spain, and a small number of others impute a notional income and assess tax on that basis, which requires a return to be filed and tax paid even where no rent is received.

The more significant consideration for unoccupied properties is typically the inheritance tax position on death, which is addressed separately in our guide on what happens to overseas property on death.

Common errors

  • Filing only in the source country and not declaring the income at home
  • Claiming the full foreign tax as a credit without checking the cap
  • Missing the net-income election in the US, Canada, or Japan and paying tax on gross rent at 25 to 30% rather than on net profit
  • Treating French social charges as income tax for credit relief purposes, when they may not qualify
On losses: Where an overseas property runs at a loss, the return should nonetheless be filed. Losses can generally be carried forward against future profits from the same country, provided they have been declared.

Unsure of your obligations in both countries?

We can review your position and refer you to the appropriate registered adviser in each jurisdiction.

Speak to us