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What is withholding tax?

Withholding tax is not a type of tax, it a mechanism by which tax authorities collect tax. The purpose of having a withholding tax is that the tax authorities can pass on the administrative burden of tax collection to the taxpayer. Where there is a cross-border payment, it gives the tax authorities a way to tax a non-resident who is outside of their jurisdiction, through effectively using a resident as an agent.

It should be noted that withholding tax can apply to transactions in a wholly domestic context and not just to cross-border transactions. For example, a UK resident company must withhold income tax on payments of interest made to a UK resident individual.

When discussing withholding tax it is helpful to have a clear understanding of the terms 'source' and 'resident'.

A company is typically only tax resident in one jurisdiction, but it can receive income from sources in many jurisdictions. Withholding tax applies at source, and the rules of the source country should be the starting point of any analysis as to the rate