Withholding Tax on Foreign Payments

Withholding Tax on Foreign Payments

Withholding tax on foreign payments refers to the tax that a country imposes on income earned by non-residents within its jurisdiction. This tax is typically deducted at the source by the payer before the payment is made to the foreign recipient.

For example, if a U.S. company pays a royalty to a foreign entity, the U.S. government may require the U.S. company to withhold a certain percentage of the payment as tax. This withholding tax is often subject to treaties between countries which may reduce the rate or exempt certain payments from withholding. The withheld amount is then remitted to the tax authorities, and the foreign recipient may be eligible to claim a credit for the tax withheld when filing their tax returns in their home country.