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What Are Double Taxation Treaties?

Double Taxation Treaties (DTAs) are bilateral agreements between two countries designed to prevent individuals and businesses from being taxed twice on the same income or profits. These treaties are crucial for international business operations.

The Problem: Double Taxation

Example: Danish Company with US Operations

• It earns profits in the US (e.g., from selling software, providing services, or having investments there)
• The US wants to tax these profits because they originate in the US
• Denmark wants to tax its worldwide income, which includes the profits earned in the US

Without a DTA, this company could end up paying tax on the same profits in both countries, making international business prohibitively expensive.

How Double Taxation Treaties Work

DTAs establish rules to allocate taxing rights between the two signatory countries (the “Contracting States”). While each treaty is unique, they generally follow a model developed by the OECD.

Important: Country-Specific Variations

Each country has different numbers of tax treaties and specific terms. For example:

• Denmark has over 80 double taxation treaties
• The US has treaties with over 60 countries
• Each treaty has unique terms, rates, and conditions

Always check the official government websites for the most current and accurate treaty information.

1. Allocation of Taxing Rights

Permanent Establishment (PE)

This is a key concept. A DTA defines what constitutes a “permanent establishment” in the other country (e.g., an office, a branch, a factory, a place where services are provided for a certain duration).

With PE in the US

The US generally has the right to tax the profits “attributable” to that PE.

Without PE in the US

The US generally has limited or no right to tax business profits, allowing Denmark to have the primary taxing right. This is particularly relevant for many SaaS businesses.

Specific Income Types

Business Profits

Typically taxed only in the country of residence unless there's a PE in the other country.

Dividends, Interest, Royalties

Can often be taxed by both countries, but with a maximum withholding tax rate set by the treaty.

Capital Gains

Often taxed only in the country of residence.

Independent Personal Services

Often tied to a fixed base or duration.

2. Methods for Eliminating Double Taxation

A. Exemption Method

The country of residence (e.g., Denmark) exempts income that, under the treaty, is taxable in the other country (e.g., profits attributable to a US PE).

Often used for business profits.

B. Credit Method (Most Common)

The country of residence allows a credit against its own tax for the tax already paid in the other country.

Example:

A Danish company earns $100,000 in the US and pays $20,000 in US tax. When calculating Danish tax on worldwide income, it can reduce its Danish tax liability by the $20,000 already paid to the US.

Often used for dividends, interest, and royalties where the source country is allowed to levy some withholding tax.

3. Additional Provisions

Non-Discrimination

Ensures citizens and companies of one contracting state are not treated less favorably in the other state.

Mutual Agreement Procedure

Allows taxpayers to resolve double taxation issues through their country's tax authorities.

Exchange of Information

Enables tax authorities to exchange information to prevent tax evasion and ensure correct treaty application.

Real-World Example: Danish SaaS Company with US Customers

Scenario: No Permanent Establishment

• A Danish SaaS company sells subscriptions to customers in the US
• It has no office, no employees, and provides no physical services in the US
• Under the Denmark-US DTA (Business Profits article), the US generally cannot tax the profits derived from these sales because the Danish company does not have a “permanent establishment” in the US

Result:

The primary taxing right remains with Denmark. The Danish company pays Danish corporate tax on these profits as part of its worldwide income. No double taxation occurs because the US never gets to tax those profits in the first place.

Key Takeaways for Your Business

•DTAs prevent double income/corporate tax on business profits. They don't directly deal with sales tax or VAT charged to end consumers.
•Your SaaS product focuses on sales tax/VAT compliance for your users' customers. This is separate from double taxation treaties but equally important for international business.
•For your own SaaS business, the Denmark-US DTA (and others you might be party to) dictates your corporate income tax exposure in foreign countries.
•Treaty terms vary significantly between countries. Denmark has 80+ treaties, the US has 60+, and each has unique terms and rates.
•Always consult with tax professionals in both countries to ensure full compliance with DTAs and local tax laws.

Official Treaty Information Sources

Where to Find Official Treaty Information

Denmark (SKAT)

• skat.dk - Official tax authority
• Search for “dobbeltbeskatning” (double taxation)
• Complete list of Denmark's tax treaties
• Treaty texts and implementation details

United States (IRS)

• irs.gov - Internal Revenue Service
• Search for “tax treaties” or “double taxation”
• Treasury Department treaty database
• Model treaty texts and explanations

Other Important Resources

• OECD Model Tax Convention - oecd.org
• UN Model Tax Convention - For developing countries
• Country-specific tax authorities - Each country maintains its own treaty database
• Professional tax databases - Bloomberg, Thomson Reuters, etc.

Important Disclaimer

DTAs are complex legal documents, and their application depends heavily on the specific facts and circumstances of a business. This information is for educational purposes only and should not be considered as professional tax advice. Any business operating internationally should always consult with qualified tax professionals in both countries to ensure full compliance.

Double Taxation Treaties