A company or an individual that is tax resident in one country can generate income from activities carried out in other jurisdictions. When this income is paid across borders — for example, as dividends, royalties, or interest - the amount received by the beneficiary is not always equal to the gross payment.
In such cases, withholding tax is charged directly at the payment stage. Before the funds are transferred to the recipient, a portion of the income is deducted and paid to the tax authorities of the payer’s country. This is a standard feature of cross-border taxation, not a penalty or an accounting error.
For businesses operating internationally, withholding tax plays a material role in profit allocation, contractual arrangements, and overall tax efficiency across multiple jurisdictions.
What Is Withholding Tax (WHT)
In international taxation, income paid abroad is often subject to tax at the point of payment. This mechanism is commonly referred to as a withholding tax. In different legal and professional sources, it may also be described as tax at source, tax on payments to non-residents, or tax on the repatriation of income. In commercial practice, the English term “withholding tax” usually abbreviated as WHT is widely applied.
Withholding tax is imposed when a payment is made to a non-resident and is deducted from the gross amount before the transaction is completed. Unlike income tax declared by the recipient after receipt, WHT is settled at the moment the payment is executed.
The obligation to calculate and remit withholding tax rests with the paying company. The payer determines the applicable tax, withholds it from the payment, and transfers it to the relevant local tax authority.
In most jurisdictions, withholding tax applies to dividends, royalty payments (including license fees), and interest on loans. The applicable rate depends on domestic tax rules and on whether a double taxation treaty is in force between the countries involved.
For businesses operating internationally withholding tax plays a material role in profit allocation, contractual arrangements, and overall tax efficiency across multiple jurisdictions.
Withholding tax rates and the role of double taxation treaties
There is no universal withholding tax rate. Each jurisdiction sets its own rates, thresholds, and exemptions, meaning that identical payments may be taxed differently depending on where the payer and recipient are located.
This is where double taxation treaties become essential. Such agreements may reduce withholding tax rates or eliminate them entirely, provided that the eligibility conditions are met.
Treaty relief is not granted automatically. The paying company must verify the recipient’s tax residency, obtain and submit the required documentation, and comply with local reporting procedures. If these requirements are not satisfied, the standard domestic withholding tax rate may still apply, even if a treaty exists.
For internationally active businesses, the taxation of cross-border payments is a matter of strategic planning. Jurisdiction choice, ownership structure, and payment flows all directly influence the final tax outcome. WoBorders supports companies in assessing treaty eligibility and setting up compliant structures before payments are made.
Indicative Withholding Tax Rates for Non-Residents in Europe, 2025
Country/Region | Dividends | Royalties | % |
Poland | 19% | 20% | 20% |
Hungary | 0% in most cases | 0% in most cases | 0% in most cases |
Romania | 10% in 2025 (16% from 2026) | 16% | 16% |
Estonia | 0% WHT; distributions taxed at 22% corporate level | 10% in typical cases | 0% WHT in many cases |
Cyprus | 0% in most outbound cases | 0–10% depending on where the IP is used | 0% in most outbound cases |
Country/Region | Key notes (domestic rules only) |
Poland | Treaty and EU directive relief may reduce or eliminate WHT if conditions are met |
Hungary | Generally, no WHT on outbound payments to corporate nonresidents; check for specific anti‑abuse rules |
Romania | Treaty networks often reduce these rates; some EU payments may be exempt when conditions are met |
Estonia | Profit distributions are taxed at 22% as corporate income tax, not as a separate shareholder‑level WHT |
Cyprus | 10% WHT can apply to certain royalties connected with IP used in Cyprus; many outbound payments are exempt |
WHT is a key element of international taxation. It affects profit distribution, contract structures, and tax compliance. Ignoring WHT can lead to additional costs, payment delays, and regulatory risks.
Proactive planning is critically important. Companies should analyze payment flows, applicable tax treaties, and procedures before funds are transferred.
Frequently Asked Questions about Withholding Tax (WHT)
Withholding tax is a tax deducted at source from certain cross-border payments to non-residents and paid to the state budget by the paying company.
The responsibility lies with the company making the payment. The payer calculates, withholds, and remits the tax, while the foreign recipient receives the net amount after WHT.
Most commonly, dividends, interest, and royalties. In some jurisdictions, management, consulting, or service fees may also be subject to WHT.
Yes. Double taxation treaties (DTTs) and, within the EU, relevant directives may reduce WHT rates or provide full exemptions, provided the required supporting documents (such as a tax residency certificate) are submitted.
No. WHT rates are set by national legislation and can vary significantly. Tax treaties may reduce the standard domestic rates.
The paying company may face penalties, late-payment interest, tax reassessments, and loss of treaty benefits.
Before signing a contract or making a cross-border payment, it is essential to structure the transaction and payment flows.
Yes. WHT influences jurisdiction selection, financing structures, contract terms, and international payment routing.
At WoBorders, we help businesses structure cross-border payments, manage withholding tax, and align company registrations and banking solutions to minimize risks and ensure compliance.
We work Monday to Friday, from 9:00 a.m. to 7:00 p.m. To receive a consultation, please contact us here.
