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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 shareholder.

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