What is Withholding Tax?

Withholding tax (or retention tax) is one of the taxes levied in certain countries or regions. Simply put, as long as non-residents or non-resident companies are employed or engage in business activities within the jurisdiction and earn income from residents or resident companies, withholding tax will be imposed. When making payments of a specified nature (such as royalties, interest, technical service fees, etc.) to non-resident companies or individuals (referred to as payees), the payer must withhold a certain percentage of the payment and remit the withheld amount (called "withholding tax") to the tax authorities.

Withholding tax rates vary between 15% and 25% across different countries globally. Since taxpayers reside abroad long-term, making it difficult for tax authorities to reach them, tax laws mandate that the payer is obligated to withhold and remit the tax in advance.

Which Types of Income Are Subject to Withholding Tax?

Each country has slight differences in withholding tax regulations, but which types of income are typically subject to it?

Dividends: Foreign investors or shareholders receiving dividends from Chinese companies are usually required to pay withholding tax. However, in some countries, such as Singapore, no withholding tax is imposed when dividends are paid to non-tax residents.

Interest, commissions, and any fees related to loans or debts: Interest on overdue transaction accounts and interest paid to non-resident suppliers under credit terms will be subject to withholding tax. Commissions paid to non-residents or any fees arising from loans are also subject to withholding tax.

Royalties: Payments made by Chinese entities to foreign enterprises for the use of intellectual property (such as trademarks, patents, or copyrights) are typically subject to withholding tax. The tax rate is based on relevant tax laws and applicable tax treaties.

Royalties or other payments for the use or right to use any movable property: Royalties paid to non-resident companies are subject to withholding tax. Additionally, payments for using commercial, scientific, technical, or industrial knowledge for business activities or hiring foreign experts to provide technical assistance are both subject to withholding tax.

Service fees: Foreign enterprises providing services within the jurisdiction may need to pay withholding tax on the service fees received. For example, services such as equipment installation, technical support, training, and consulting are typically subject to withholding tax only if they are physical services. Virtual services provided over the internet are not subject to withholding tax as they are not considered within the jurisdiction.