WithholdingTax
Withholding tax
Withholding tax — a tax withheld by a country on a payment to a non-resident (dividends, interest, royalties) when transferred abroad.
- What it is
- Withholding tax — tax withheld when income is paid to a non-resident
- Where to start
- On dividends, interest and royalties going abroad
- Who withholds it
- The payer of the income in the source country
- How to reduce it
- Through double tax treaties
- How to use it
- Take it into account in cross-border payments
In plain words
Withholding tax is a tax that a country withholds from certain payments made to a non-resident at the moment of payment, “at source”. Classic examples are dividends, interest on loans and royalties that a company in one country pays to a recipient in another. The payer must withhold the tax and pay it to the state, and the recipient receives the amount net of it.
Withholding tax rates are set by national legislation and can be quite high. This is where tax treaties (DTTs) play a key role, however: they often reduce or eliminate withholding tax for residents of treaty countries. That is why the existence of an advantageous treaty between the source country and the recipient’s country directly affects the final tax burden.
For international investors and holding companies this is a fundamental point: when receiving dividends, interest or royalties from abroad, it is important to know in advance the withholding tax rate and whether it can be reduced under a treaty. Withholding tax that is not taken into account can seriously reduce returns. We take this factor into account when building a structure, choosing jurisdictions and completing the paperwork for reduced rates to apply.
Where withholding tax arises
What matters about withholding tax
- Dividends
- Interest
- Royalties
- Withheld on payment
- In the source country
- The payer pays it over
- Tax treaties
- Reduced rates
- Sometimes to zero
- Affects returns
- Documents are needed
- Plan in advance
How to optimise
- 01Identify the type and country of payment
- 02Find out the withholding rate
- 03Check for relief under a DTT
- 04Complete the paperwork for the relief
- 05A reduced burden
What you need to know
- Withholding tax is withheld when income is paid to a non-resident
- It concerns dividends, interest and royalties
- It is withheld by the payer in the source country
- Tax treaties often reduce the rate
- Withholding tax not taken into account noticeably reduces returns
Common mistakes
- Not taking withholding tax into account when calculating returns
- Not checking for relief under a treaty
- Not completing the paperwork for the reduced rate
- Choosing a structure without regard to withholding tax
- Assuming the relief applies automatically
What this means for a BRIDGES client
We take withholding tax into account when building your international structure: we determine the rates, choose jurisdictions with advantageous treaties and complete the paperwork for reduced rates on dividends, interest and royalties. That way your returns are not lost to tax withheld on cross-border payments.
Frequently asked questions
01 /What is withholding tax?
A tax that a country withholds from a payment of income to a non-resident at the moment of payment — for example, from dividends, interest or royalties going abroad.
02 /From which payments is it withheld?
Most often from dividends, interest on loans and royalties that a company in one country pays to a recipient in another.
03 /Who withholds it?
The payer of the income in the source country: they withhold the tax and pay it to the state, and the recipient receives the amount net of it.
04 /Can withholding tax be reduced?
Yes, through double tax treaties: they often reduce or eliminate the rate for residents of treaty countries, provided the necessary documents are completed.
05 /Why does it matter to an investor?
Withholding tax not taken into account noticeably reduces returns. That is why it is important to know the rate in advance and whether it can be reduced under a treaty.
06 /Is the relief applied automatically?
Not always: documents are often needed, such as proof of tax residence. We help apply the reduced rate.
See also
Read next
This material has undergone editorial review by BRIDGES.
Receiving income from abroad?
We will take withholding tax into account and choose a structure with treaty reliefs — so that returns are not eaten up on payment.