In economics and finance WHT stands for Withholding tax (tax at source). This tax has many names – non-resident income tax, withholding tax, repatriation tax.


WHT meaning

Do you receive income from a foreign company? How to do it right

When working with a foreign customer, regardless of the country, there is always an obligation to pay taxes. Get income, please, pay taxes. How to do it right so as not to end up at a loss? Bank commissions, agency fees, taxes and fees all need to be taken into account.

Foreign withholding tax is a small detail that can eat up about 30% of your income.The list of incomes that are subject to this tax, rates and restrictions are prescribed in the national legislation of each country and in international double taxation treaties.International treaties on the avoidance of double taxation, although not the same, have a similar structure and legal nature.If you work directly with an IT service customer, do not be alarmed if you are asked to provide a tax certificate from your country confirming that your company is an honest taxpayer who will definitely pay all the necessary taxes.Profits from commercial activities - active income in this case, are taxed only in the state of which the recipient of the profit is a resident.

Such a state imposes an unlimited tax liability - "full tax liability" on all income from all sources, including foreign ones.

That is, withholding tax in this case is not withheld in the source country of income, but you still have to pay all taxes and fees according to the rates of your country, depending on the taxation system.

Each type of income has its own rules of the game

The IT sector is always looking for new markets and favorable conditions. Doing IT business in Europe or the USA from Ukraine has long become commonplace. The rules of taxation withholding tax in this case will be different, since passive income arises in the form of interest, dividends or royalties.

Let's take, for example, a C-corporation company registered in the USA with 2 shareholders resident in Ukraine.

The company is successful, according to the results of the reporting year, it made a profit, paid all the necessary taxes, and at the general meeting of shareholders it was decided to distribute this profit in the form of dividends.

Under US law, the payment of dividends to non-US citizens is treated as taxable income from US source and is subject to withholding tax of 30%.

This is where the Convention signed by the Government of Ukraine and the US Government on the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income and property comes into play.

It says that when paying dividends, both the country of residence of which the actual recipient of dividends is, and the country in which this income originated, have the right to tax such income.

What does WHT mean - example

This right of the source country is limited to specific rates. For example, the US government must withhold tax at a rate of no more than 15% of dividends paid by an American company to a Ukrainian shareholder.

The government of Ukraine, in turn, in our example has the right to apply the personal income tax rate of 9% + military tax of 1.5%.

After counting - 15% in the US versus 10.5% in Ukraine, it seems that it is more profitable to pay in Ukraine and even save 4.5%.

But, unfortunately, the taxpayer does not have the right to choose in which country it is more profitable or more convenient to pay taxes.

Both countries, both the US and Ukraine, have the right to tax this type of income.

What about avoiding double taxation?

The avoidance of double taxation consists in the fact that the country in which the shareholder is a resident (Ukraine) is entitled to tax such dividends, taking into account the tax paid in the country that is the source of income (USA).

That is, it is possible to make a “mutual offset” of taxes? It is possible, but for this you need to make a little effort and take into account the nuances:

To obtain the right to credit taxes and fees paid outside of Ukraine, it is necessary to obtain from the state body of the source country of income a duly executed certificate on the amount of tax paid, as well as on the tax base;
In Ukraine, the Convention applies to corporate income tax and personal income tax. If withholding tax and personal income tax are essentially identical and “set-off” is possible here, then this rule does not work with military tax.
Thus, at the stage of paying dividends to him from a C-corporation registered in the USA, a resident shareholder of Ukraine has the following taxation structure:

at the company level, profits are taxed at a rate of 21%;at the time the company pays dividends to a non-resident individual, the tax agent (C-corporation) withholds 15% withholding tax. At this stage, the shareholder must take care of obtaining a certificate of the amount of tax withheld and the tax base;in Ukraine, such a shareholder in any case remains obliged to file an annual tax return on property status and income, attach to the received certificate of taxes already paid in the United States, and also pay an additional military tax at a rate of 1.5% to the budget of Ukraine.

If you cannot influence the first level of taxation, then at the second and third levels, depending on the terms of international agreements, you have the right not to pay twice.


WHT meaning: summary

It is important to understand that royalty taxation may differ as a game may have multiple authors.

In the general calculation of the tax burden, it is necessary to take into account the taxation system and the presence, for example, of a permanent representative office of your company in another country.

In addition, the Conventions provide for a special procedure for taxing income from the operation of real estate, international transport, income from the alienation of property, independent and dependent personal services, and much more.

A lot depends on the agreements between the two countries - the source country of income and the country - the resident recipient of income. Taxation rates for each type of income are established in a specific Convention.

Paying taxes is a duty, not overpaying is a right.

But do not forget that each operation, payment and transaction is individual and this article is not tax advice.

Business and Finance terms

Withholding Tax General Accepted Accounting Standards Letter Of Intent Scarcity Year-to-date Long-Term Liabilities Non-Disclosure Agreement Chief Operating Officer Return on Investment Chief Marketing Officer Chief Financial Officer Asset Protection Trust Chief Security Officer Certified Financial Planner Electronic Funds Transfer Limited Liability Company Close of Business Company Finance Cash Flow Automated Teller Machine Return on Equity stagnation Certified Management Accountant Non-Profit Organization Certified Financial Manager Chief Technology Officer Profit and Loss Profit and Loss Statement Gross Margin