Withholding tax definition

Withholding tax is tax deducted from a payment at source, before the money reaches the recipient. The payer sends the deducted amount straight to the tax authority and passes on only the balance.

Withholding tax can apply to salaries, dividends, interest, royalties, contractor fees, and cross-border investment income. The rate depends on the country, the type of income, the recipient's status, and any tax treaty between the countries involved.

Withholding tax differs from tax paid on assessment. Tax on assessment is worked out and paid later, usually through a tax return. Withholding tax is taken upfront by the payer. In some cases it is a final tax with nothing more to pay; in others it counts as a credit against the recipient's total tax bill for the year.