How do tax treaties between countries work?

Tax treaties between countries are agreements that reduce the amount of taxes paid by individuals and companies to both countries. These treaties are made to ensure that individuals and companies are not double-taxed on their income and assets. When someone has income from a different country than where they are a resident, the country from which the income was earned may be entitled to collect taxes. For example, a person who lives in the US but earns income in France would be required to pay taxes to both countries on the same income. To avoid this situation, countries can enter into tax treaties with one another. Tax treaties provide certain exemptions and tax credits to individuals or companies to help eliminate the double taxation of income earned in different countries. The treaties generally provide for the reduction of taxes by either lowering the rate of taxes applied or by exempting some categories of income from taxation. Tax treaties can also provide specific rules on how income is taxed when it is transferred from one country to another. For instance, tax treaties may provide that dividends, interest or royalties paid to a company in one country are exempt from tax in the other. Overall, tax treaties between countries work to provide a fairer way of taxing international income and investments and helping avoid the situation of double taxation.

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