Taxes

Withholding tax

Tax deducted at source by the payer and remitted to the tax authority on behalf of the recipient, typically on dividends, interest, royalties and some service fees.

What Withholding tax means

Withholding tax shifts the collection of income tax to the payer. Instead of the recipient declaring the income, the company paying a dividend, interest, royalty or certain fees deducts tax at a statutory rate and pays it to the tax authority, giving the recipient a certificate for the net amount. The recipient then credits the withheld amount against its own tax or claims a refund.

Within the EU the Parent-Subsidiary and Interest and Royalties Directives remove withholding tax on qualifying payments between associated companies, and double tax treaties reduce the rates in other cases, usually against a certificate of residence. Some countries also withhold on payments to foreign contractors or on construction services. Payroll taxes deducted from salaries are a form of withholding as well. Kontevia flags invoices from foreign suppliers where a withholding obligation may arise.

Related terms

Corporate income taxThe tax companies pay on their annual profit. Rates and bases are national; the EU coordinates only anti-avoidance rules and the minimum tax for large groups.Personal income taxThe tax individuals, including sole traders, pay on their income. Business profit is taxed together with other income under national progressive or flat rates.Tax returnThe periodic declaration a business files with the tax authority to report its tax base and the tax due. VAT returns are monthly or quarterly; income tax returns are annual.Advance payment (tax prepayment)Instalments of income or corporate tax paid during the year based on the previous year's tax, settled against the final liability in the annual return.

This entry is general information, not tax advice. Rules change; check the current position with your adviser or the tax authority of your country.

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