Selling services overseas

Understanding withholding tax when exporting a service

What you’ll learn

  • what a withholding tax is and why it’s important
  • how to get an exemption from paying withholding tax
  • best practice in dealing with any tax you’re due to pay

Withholding tax is sometimes levied by overseas governments on dividends, royalties or other income received by non-residents of that country. Service exporters need to be aware of any withholding tax policies in their target market and plan accordingly.

How withholding tax works

If a withholding tax is levied on the service you’ve exported, your overseas client will retain some of the money owed to you and pay it directly to the government in their country.

For example, if a UK company supplies a service for £10,000 and the withholding tax is 20%, the client will only pay £8,000 against the invoice, with the rest going to the tax authority in the client’s country.

How to find out if you’re liable to withholding tax

Because withholding tax is not charged in all countries, or for all types of service, it can often be difficult to find out if the service you’re exporting is liable. Try to find out as much information as possible by:

  • asking your accountant
  • doing your own research
  • asking your customer during the negotiation process

Whatever you do, make sure you know your tax liabilities before you issue a quote to your customer, and factor it into your pricing model.

International trade adviser

Double taxation agreements and exemptions

In some cases, you may be able to apply for an exemption to withholding tax.

The UK has Double Taxation Agreements (DTAs) with a number of countries, which may allow you to claim back or reduce the amount of withholding tax you are liable to pay.

See the latest information on the UK’s tax treaties and multilateral agreements

If an agreement is in place, you will need to fill out the relevant documentation to claim back any tax you’ve paid.

Best practice for dealing with potential withholding tax

  1. At the negotiation stage and before you submit a quote, check whether withholding tax or any other local taxes will be applied to the contract.
  2. If withholding tax is applied, find out if you can get an exemption by proving your UK tax residency status.
  3. If there is no straightforward means to obtain an exemption, quote a price that will cover any deductions due to taxation.

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