Overseas taxes

When a payment is made to a party in another country, the laws of the payer’s country may require withholding tax to be applied to the payment. International withholding taxes may be required for:

  • financing, i.e. dividends or interest
  • the use of intellectual property, i.e. royalties and licence fees
  • consultancy fees and management fees and
  • rental of real estate, and other payments connected with real estate.

Withholding tax is the amount of tax withheld by a party making a payment to another and then paid on to the taxation authorities. The amount that the payer deducts may vary, depending on the nature of the product or service being paid for. The purpose of withholding tax is to facilitate or accelerate collection by collecting tax from payers rather than a much greater number of payees and by collecting tax from payers within the jurisdiction rather than from payees who may be outside the jurisdiction. It may also be used to counteract tax evasion and tax avoidance.

The payee is typically assessed to tax on the gross amount with the possibility of using that withholding tax to offset part or all of the overall tax liability of the entity. Therefore, withholding taxes can be particularly sensitive for tax-exempt entities such as charities, which are typically unable to use any withholding tax suffered to offset a UK tax liability (because they are unlikely to have any such liability).

A Double Taxation Treaty may reduce the amount of withholding tax required from the statutory rate to the treaty rate, depending upon the jurisdiction in which the recipient is resident for tax purposes.

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