Beware of ‘limitation of relief’ clauses in tax treaties
26th September 2025
Posted in Articles by Forbes Dawson
There are many tax treaties between the UK and various different countries. These are agreements between the countries about who has the taxing rights on different categories of income and gains. If this agreement departs from a country’s domestic rules, then treaty relief can be taken.
Example
John is resident in the UK and makes a capital gain on a German property. As a UK tax resident, he is taxable on his worldwide income and gains, however, the tax treaty with Germany says that Germany can tax any gain. Therefore, John pays tax in Germany, and he can take ‘double tax relief’ in respect of this by reducing the tax payable in the UK by any German tax paid (up to a maximum of all the UK tax payable).
Tax treaties are helpfully divided into different sections according to the category of income or gains. However, there can be other sections which are also relevant, even though they are not mentioned in the appropriate category of the treaty. I am referring here particularly to ‘limitation of relief’ articles which are found in some treaties.
UK-Malta treaty and ‘limitation of relief’
Example
Derek is taxable in Malta under the remittance basis of taxation (non-Maltese income and gains are only taxable when remitted). Derek is seeking to pay some pension income from his UK SIPP and consults the UK-Malta tax treaty to evaluate the tax situation. Article 18 talks about ‘pensions’, and states “(1) Subject to the provisions of paragraph (2) of Article 19 of this Convention, pensions and other similar remuneration paid in consideration of past employment, or any annuity paid, to an individual who is a resident of a Contracting State shall be taxable only in that State”. Derek duly looks at paragraph (2) of Article 19 and confirms that this does not apply to him (this relates to pensions for government service which must be taxed in the UK).
Derek therefore concludes that he can receive his UK pension free from UK tax and free from Maltese tax (because he will not remit it to Malta). This is not quite right because Article 23 (which is not referred to in Article 18) effectively says that the treaty relief for pensions (which allows the UK pension to be taxed only in Malta) will only apply if the pension is remitted to Malta.
Forbes Dawson view
When ascertaining a point from a tax treaty, the safe approach should be to read the entire tax treaty because there can be times when one article has the effect of negating something that is said in another article (as above). Articles can also refer to things in an ‘Exchange of Notes’ which is further documentation outside of the treaty itself (the UK-Malta treaty also refers to these in Article 23). On a similar point, taxpayers who ‘live’ in one jurisdiction of the tax treaty should also confirm that they are actually resident in the jurisdiction for tax purposes. This will usually be defined in paragraph 1 of the resident article. These kinds of issues are becoming more and more relevant as more people leave the UK in response to unattractive tax measures.
