Updated
GL-W-04
Glossary · Taxes and residency
Withholding tax - the tax deducted when income is paid abroad
Withholding tax — a tax withheld by a country on a payment to a non-resident (dividends, interest, royalties) when transferred abroad.
01 / In 30 seconds
The short answer
- 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
02 / In plain words
What Withholding Tax means
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.
A case from practice
An investor receives dividends from a country with high withholding tax. We structure the holding through a jurisdiction with an advantageous tax treaty that reduces the withholding rate, and complete the paperwork for the relief. As a result, substantially more reaches them than if they received the dividends directly.
Where withholding tax arises
- Paying dividends abroad
- Interest on international loans
- Royalties and licence fees
- Holding structures
- International investments
- Applying treaty reliefs
03 / What it covers
What matters about withholding tax
Where to start
- Dividends
- Interest
- Royalties
How it works
- Withheld on payment
- In the source country
- The payer pays it over
How to reduce it
- Tax treaties
- Reduced rates
- Sometimes to zero
Keep in mind
- Affects returns
- Documents are needed
- Plan in advance
04 / How it works
How to optimise
Identify the type and country of payment
Dividends, interest or royalties, from which country and to whom.
Find out the withholding rate
We look at the national rate in the paying country.
Check for relief under a DTT
We look for a treaty between the source country and yours.
Complete the paperwork for the relief
Residency certificate and forms for the payer.
A reduced burden
Tax is withheld at the reduced rate.
05 / Key facts
What you need to know
01What is taxed
Dividends, interest, royalties
Payments by a company in one country to a recipient in another. The tax is deducted at the moment of payment.
02Who withholds
The payer in the source country
It pays the tax to the state; the recipient gets the amount net of tax.
03Rate
Reduced by treaty
The national rate can be high, while a double tax treaty often reduces it or brings it to zero.
04Relief
Only with documents
A tax residency certificate and the payer's forms are needed before payment. Relief is not applied automatically.
Common mistakes
Leaving withholding tax out of the return
Calculate income after withholding in the paying country and credit in your own.
Assuming relief applies by itself
Give the payer the residency certificate and forms before the payment.
Designing a structure without this tax
Check treaties between the source country and the recipient's country at the design stage.
06 / Expert advice
How to prepare in advance
When planning cross-border payments (dividends, interest, royalties), find out in advance the withholding tax rate in the payer’s country and whether it can be reduced under a tax treaty. Choose jurisdictions with advantageous treaties and complete the paperwork (proof of residence and others) for the reduced rate to apply. Then returns are not eaten up by tax that was not taken into account.
What we do for you. 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.
Dmitry NagyTax consultant, international taxation and compliance (ex-Big4)
07 / Questions
Frequently asked questions
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.
Most often from dividends, interest on loans and royalties that a company in one country pays to a recipient in another.
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.
Yes, through double tax treaties: they often reduce or eliminate the rate for residents of treaty countries, provided the necessary documents are completed.
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.
Not always: documents are often needed, such as proof of tax residence. We help apply the reduced rate.
INITIAL ASSESSMENT
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