What is withholding tax?

Withholding tax, also known as retention tax, is a tax that is deducted or withheld from the payment made to a non-resident individual or a foreign entity by a resident entity, such as an employer, in the country where the payment is made. The tax is withheld at the source of the payment, meaning it is deducted from the payment before it is paid to the recipient.

The purpose of withholding tax is to ensure that non-resident individuals and foreign entities pay their share of taxes on the income earned in a particular country. Withholding tax is usually a percentage of the payment made, and the rate can vary depending on the type of payment, the recipient, and the country in which the payment is made.

The withheld tax is then paid to the government by the resident entity, which is responsible for withholding the tax. The recipient can claim credit for the withheld tax when filing their tax returns in their home country, or they may be entitled to a refund if the amount withheld exceeds their tax liability in the country where the payment was made.

Withholding tax can apply to various types of income, including:

1. Wages and salaries: Employers are required to withhold income tax from the wages and salaries they pay to their employees.
2. Dividends: When companies pay dividends to their shareholders, they may be required to withhold tax at the source.
3. Interest: When interest is paid on investments, such as bonds or bank deposits, withholding tax may be applicable.
4. Royalties: When a company pays royalties for the use of intellectual property, such as patents, copyrights or trademarks, withholding tax may apply.
5. Rent: When a non-resident earns rental income from property located in another country, withholding tax may be imposed on the rent received.
6. Capital gains: In some countries, withholding tax may be applicable on the sale of certain assets, such as stocks or real estate, by non-residents.

The specific rules and rates for withholding tax vary depending on the country and the type of income involved. It’s important to consult with a tax professional or seek guidance from the relevant tax authorities to ensure compliance with applicable laws and regulations.