Withholding Tax: A Comprehensive Guide

For finance and tax leaders, withholding tax on cross-border payments can be tricky to navigate. Knowing when tax must be deducted at source, how double tax treaties can reduce those taxes, and what paperwork is required will save your business time and money. In this guide, we break down the essentials of managing withholding tax outside the UK, in clear terms, with relatable examples and the latest updates.

What Is Withholding Tax?

Withholding tax (WHT) is a tax deducted at the source of certain payments to non-residents. In practice, this means the payer withholds a percentage of income (e.g. interest, dividends, royalties) and remits it to the tax authorities on behalf of the overseas recipient. For example, the UK generally imposes a 20% WHT on interest, rent, or royalty payments made to non-residents. The purpose is to collect tax upfront and ensure foreign recipients don’t escape taxation in the source country. Notably, the UK does not levy withholding tax on routine dividends paid by UK companies (except certain property-related distributions), so dividend payments are usually free of withholding. Other countries have their own WHT rates; it’s common to see rates of 15%–30% applied to various cross-border payments unless reduced by an exemption or treaty.

Why Do Tax Treaties Matter?

Double taxation treaties (DTTs) exist to prevent the same income from being taxed twice by two countries. These bilateral agreements often limit the maximum withholding tax rate that the source country can charge, or sometimes eliminate WHT for certain types of income. If you’re making or receiving cross-border payments, claiming treaty benefits can dramatically lower the withholding tax cost.

For instance, without a treaty, interest paid by a UK company to a lender in Italy would normally suffer the full 20% UK withholding tax (the UK company would deduct £2,000 on a £10,000 interest payment). However, under the UK–Italy tax treaty, interest withholding is capped at 10%. By obtaining treaty relief, the UK company would only withhold £1,000 on that £10,000 payment – saving £1,000 and ensuring the Italian recipient isn’t taxed twice on the same interest income. Similar reductions apply for other payments like royalties and dividends under many treaties, often bringing WHT down to 0% or a much lower rate depending on the treaty’s provisions.

How to Manage Withholding Tax and Claim Treaty Relief

Managing withholding tax effectively involves a mix of planning, paperwork, and compliance. Here are key steps and tips to keep you on track:

Identify When Withholding Applies

First, determine if the payment is subject to withholding tax. In the UK, the default WHT on most annual interest and royalty payments to non-residents is 20% (with some exceptions for certain interest paid by banks or on quoted Eurobonds). The UK generally does not impose withholding tax on ordinary company dividends (only specialised cases like REIT property income distributions have 20% WHT). For payments from an EU country, each member state sets its domestic rates. For example, Belgium imposes a flat 30% WHT on dividends, interest, and royalties by default (though numerous exemptions or reductions may apply locally). Always check the source country’s domestic rules: some countries have no withholding tax on certain payments or provide lower rates for specific recipients even before considering any treaty.

Check the Relevant Tax Treaty

Once you know the base WHT, consult the tax treaty between the payer’s country and the recipient’s country. Find the treaty article for dividends, interest, or royalties as applicable, and see what reduced rate or exemption is offered. For a UK company paying a non-resident, look up the UK’s treaty with that country (e.g. the UK–France or UK–Italy treaty) and confirm the maximum WHT rate allowed. Treaties often reduce WHT to somewhere in the range of 5–15%, and in many cases (especially for interest and royalties) they can eliminate the withholding tax if conditions are met. Make sure the recipient meets any conditions in the treaty (such as being the beneficial owner of the income, or a minimum shareholding in case of dividend reductions).

Apply for Treaty Benefits Properly

Simply having a treaty won’t help unless you claim the relief. This usually requires paperwork:

• Certificate of Tax Residence (CoR): Obtain a CoR for the recipient from their home tax authority to prove they are a resident entitled to treaty benefits. For UK payers, HMRC issues CoRs (for companies/partnerships use form RES1 online, and for individuals, there’s an online CoR service). The CoR is generally valid for 12 months and should be provided to the foreign tax authority or attached to a relief-at-source application.
  
  
• Relief-at-Source vs. Refund: Depending on the country, you may either apply in advance to have the reduced treaty rate applied when the payment is made (relief at source), or you might have to suffer the full withholding first and then file a reclaim for a refund of the excess. Many EU countries allow relief at source if you file the right forms and CoR before or at the time of payment. Others require a post-payment refund claim. Always follow the specific procedure of the source country to secure treaty relief – this could mean filling out a treaty claim form from that country’s tax authority or using the OECD’s Common Treaty Relief forms if available.

Comply with UK Reporting

If you are a UK entity that withholds tax on payments (e.g. interest or royalties), you must report and remit that tax to HMRC. Form CT61 is used by UK companies to report any Income Tax withheld each quarter on interest, royalties, annual payments, etc. The CT61 return (and payment of the tax) is due within 14 days after the end of each quarter (for quarters ending 31 March, 30 June, 30 September, 31 December, the deadlines are 14 April, 14 July, 14 October, 14 January respectively). Even if you’ve applied a treaty rate (say you withheld only 10% under a treaty instead of 20%), you still include those payments on the CT61. Failing to file the CT61 or pay on time can trigger penalties and interest, so mark those calendar dates. This filing is required whether the payment was to an individual or a non-resident company, unless an exemption fully applied (for example, if you had advance clearance to pay gross under a domestic exemption or EU directive).

Keep Thorough Records

Maintain a file with all relevant documents for withholding tax compliance. This includes your tax calculations (how you determined the amount to withhold), copies of Certificates of Residence, any treaty claim forms or correspondence filed, and the CT61 returns and payment receipts (for UK payers). Good record-keeping will help if there are any questions from tax authorities later or if you need to renew treaty relief claims each year. It also ensures that if personnel change, the next person in your team can understand what was done.

Plan for Cash Flow

Remember that withholding tax, even if refundable, affects cash flow. If you expect to reclaim foreign WHT under a treaty, it may take months to get the refund. Plan for the cash impact – for example, if a large dividend from an EU subsidiary will have foreign tax withheld, start the treaty relief process early or be prepared to fund the interim tax cost. In the UK, if you know you will be paying interest or royalties that qualify for an exemption (or to a treaty country), apply early for any clearances or certificates needed so that you don’t end up over-deducting tax and then scrambling to fix it later.

Know When to Get Help

The rules can differ by country, by income type, and by the specific situation (corporate vs individual, related-party vs third-party, etc.). If you’re unsure about the withholding obligations or treaty process for a particular payment, consider consulting a tax professional with cross-border expertise. They can help ensure you don’t overlook an exemption or treaty article that could save you money. Note: WellTax’s own International Services team specialises in treaty interpretation and cross-border tax compliance – professional advice can be invaluable for complex scenarios.

Latest Updates and Changes to Know in 2025 for the UK

Cross-border tax rules are always evolving. Recent changes in the post-Brexit landscape and new international initiatives affect how you manage withholding taxes between the UK and the EU. Here are some key updates:

Post-Brexit Changes (UK–EU Payments)

Since Brexit, the UK is no longer part of certain EU directives that used to simplify withholding tax in the EU. Notably, the EU Interest and Royalties Directive, which had allowed associated companies in EU member states to pay interest and royalties to each other without any WHT, no longer covers UK transactions. This means payments between the UK and EU now rely solely on domestic law and bilateral tax treaties rather than automatic EU exemptions. For example, an interest payment from an Italian subsidiary to a UK parent will not enjoy the old EU directive exemption anymore – Italy would levy its domestic 26% WHT by default, unless the Italy–UK treaty (capping it at 10% in that case) is invoked. The same goes for dividends and royalties: you must look to the treaty relief, because the Parent-Subsidiary Directive (which eliminated withholding on many intra-EU dividends) also no longer applies to UK companies. Bottom line: post-Brexit, always check the treaty for UK–EU payments, and don’t assume an EU-wide exemption.

Key UK Withholding Tax Rules

The UK’s own withholding tax rules have a few points worth emphasising in 2025, especially now that only domestic rules and treaties govern UK–EU flows:

Dividends:

The UK generally does not impose withholding tax on dividends paid by UK companies to shareholders, whether they are UK or foreign. This zero rate applies to normal dividends. (One exception: Property Income Distributions (PIDs) from UK Real Estate Investment Trusts are subject to 20% WHT by law, but even there, certain investors can register to receive PIDs gross or reclaim the tax if a treaty deems the income exempt.)

Interest:

A 20% withholding tax applies to most “annual interest” payments made by UK companies to non-UK residents. “Annual interest” essentially means yearly interest on loans or debt, which covers typical interest on commercial loans, intercompany loans, etc. Some interest can be paid gross under specific domestic exemptions (e.g. interest on qualifying Eurobond securities, or interest paid by banks and deposit takers to non-residents). If no exemption fits, you must deduct 20% unless a treaty reduction or exemption is claimed. Many treaties reduce UK interest WHT to 0% or 10%.

Royalties:

Similarly, royalties (for use of intellectual property, copyright, patents, trademarks, etc. sourced in the UK) are subject to 20% withholding tax when paid to non-residents, unless an exemption or treaty applies. The UK has incorporated the OECD IP regime exemptions, so in some cases, payments for the use of certain intellectual property might be exempt from WHT under UK law (or if the royalty relates to an asset used in the UK trade of the recipient). However, in most straightforward cases you should assume a 20% rate and then see if a treaty lowers it – and indeed many treaties cap UK royalty tax at 0–10%. Always review the specific treaty article and, if applicable, follow HMRC’s process to get clearance for the reduced rate before paying a royalty out of the UK.

Differences in Withholding Tax Across the EU

Within the EU, each country has its withholding tax rates and rules, so the landscape is fragmented. Some notable points to keep in mind:

• Several countries impose high “headline” withholding tax rates but then offer reductions. For example, Belgium’s statutory withholding rate is 30% for dividends, interest, and royalties paid to non-residents. This 30% rate would apply unless a treaty or EU directive (for intra-EU payments pre-Brexit) reduces it. Belgium, like others, also has various domestic exemptions (e.g. no WHT on certain interest paid to EU banks, or on royalties for qualifying R&D investments, etc.).
  
• Other EU countries have different rates for different income types. Italy, for instance, has a 26% default withholding tax on interest and dividends to non-residents, and 30% on royalties (absent treaty relief). Germany typically levies 25% plus surcharge on dividends, 0% on most outbound interest (since 2009) except profit-sharing bonds, and 15% on royalties – again, subject to change by treaties.
  
• Always check both the domestic law and any EU directives or treaties in play. Some EU countries have domestic withholding tax exemptions for payments to certain related companies or EU/EEA residents. For example, France often reduces or exempts WHT on interest paid to companies in the EU (under certain conditions) even aside from treaties. However, after Brexit, those specific EU benefits won’t apply to UK recipients, so a UK company now needs to rely on the France–UK treaty instead.
  
• The key message: know the local rules of the paying country. Do not assume all EU countries operate like the UK. If you’re receiving income from an EU entity, you may need to file documents in that country to claim any reduction. And if you’re paying from an EU country, ensure you’re aware of any local registration needed (some countries require non-residents to obtain a tax ID or file a form to enjoy treaty rates at source).

Evolving Treaty Requirements and Administration

It’s worth noting that tax treaties themselves are evolving. Since 2020, a number of UK–EU tax treaties have been updated (often through new protocols or entirely new treaties) to reflect modern tax standards and anti-abuse measures. Some treaties now include additional conditions to obtain benefits. For example, several newer treaties have “subject to tax” clauses or documentation requirements – meaning you might need to prove that the income in question is actually taxable or taxed in one country before the other country grants treaty relief. A case in point is the updated UK–Portugal treaty, which introduced provisions around pension taxation: certain income like UK pensions paid to Portugal residents are now taxable in Portugal (where previously they might have been exempt), unless you can show they were taxed in the UK. This is aimed at preventing situations where income could otherwise go untaxed in both countries.

When dealing with treaty relief, always read the fine print in the treaty articles and protocols. Look out for sections titled “Limitation on Benefits”, “Entitlement to Benefits”, “Residence” definitions, or any prerequisites for relief at source. Some countries (e.g. Portugal in recent guidance) require a certificate not only of residence but also a statement that the income has been or will be subject to tax in the other state if the treaty benefit is to apply. These anti-avoidance rules mean you should double-check current treaty versions (many have been amended post-2020) rather than relying on old assumptions. When in doubt, get professional advice or confirmation from the relevant tax authority on how to claim relief properly under the latest treaty provisions.

The EU’s New “FASTER” Withholding Tax Directive

One of the biggest developments on the horizon in the EU is the adoption of the FASTER Directive (adopted by the EU Council in December 2024). This directive is designed to make reclaiming or getting relief from withholding tax on cross-border investment income “faster and safer” across all 27 EU states. Here’s what you need to know:

Common Digital Residence Certificate (eTRC)

FASTER will introduce a standardised electronic Tax Residence Certificate for use across the EU. Instead of paper forms for each claim, investors will be able to obtain a digital residence certificate (the eTRC) from their home country that can be used in multiple countries. The eTRC will be valid for up to one fiscal year and should be issued within a short time (14 days of request under the directive). All EU member states will recognise this single certificate as proof of residence, which should significantly cut down on repetitive paperwork when claiming treaty rates or refunds in multiple jurisdictions.

Relief-at-Source and Quick Refund Options

The directive pushes EU countries to implement two streamlined procedures for cross-border portfolio investments (initially focusing on publicly traded shares and bonds). One is a “relief at source” – meaning the paying agent will apply the reduced treaty rate immediately when interest or dividends are paid, so the investor doesn’t get overtaxed. The other is a “quick refund” – meaning if excess tax is withheld, the tax authorities will refund it within a specified short period (proposed within 50–60 days of the payment or of the claim), rather than the many months or even years it can take currently. Each member state can choose which method to implement (or both), but either way, investors should get relief more quickly than before.

Certified Financial Intermediaries (CFIs)

To make the system work, the EU will rely on certified financial intermediaries – these are banks, brokers, custodians, and other qualified institutions who can apply the treaty relief at source or fast-track the refund on behalf of investors. CFIs will have to register in a national registry and will be responsible for verifying investor information (like ensuring the investor is eligible for the treaty rate, has a valid eTRC, etc.). They will transmit the necessary data through a centralised EU portal to the source country’s tax authority to get approval for relief. This effectively streamlines the process since large financial intermediaries can handle claims for many investors in bulk and communicate directly with tax authorities electronically.

Timeline

EU Member States must transpose the FASTER Directive into national law by 31 December 2028, and the rules must become effective from 1 January 2030 at the latest. So, while this doesn’t change 2025 operations, it’s a sign of things to come in the next few years – especially relevant if you have EU subsidiaries or investors.

UK’s Position

The UK, having left the EU, is not part of the FASTER initiative and is not obliged to implement these procedures. However, if you have subsidiaries, parent companies, or investors within the EU, they will benefit from these changes once in force. For example, if your UK company has shareholders in various EU countries receiving dividends, those investors might in the future get their reduced-rate withholding at source or quicker refunds via the new system (for now, UK companies aren’t within the scope since FASTER is targeting payments within the EU). Conversely, if your EU-based subsidiary pays you dividends, the process of claiming back foreign withholding tax should become much easier for the UK parent – potentially via an eTRC and a faster refund. Keep an eye on these developments; while the UK may choose to make its improvements separately, the EU’s changes could indirectly benefit UK businesses engaged in European markets.

Conclusion

In summary, careful management of withholding taxes on cross-border payments can prevent unnecessary costs and administrative headaches. Always determine upfront if a payment needs tax withheld, and use the relevant treaty to reduce the rate whenever possible. Stay on top of reporting deadlines (like the UK’s CT61 returns) and keep your documentation (Certificates of Residence, filing proofs) in order. As we’ve outlined, the landscape is changing – from post-Brexit treaty tweaks to major EU reforms like the FASTER directive – so staying informed is crucial. By being proactive (for example, applying for treaty relief before a payment is made, or starting refund claims promptly), you can significantly improve your company’s cash flow and ensure you’re in full compliance with both UK and foreign tax laws.

Finally, don’t hesitate to seek expert help for complex situations. Cross-border tax rules have many nuances, and a professional can help tailor solutions to your business. With the right approach, you can make cross-border payments as efficiently as possible and avoid paying more tax than is necessary. If you need personalised advice or assistance navigating these rules, reach out to a qualified cross-border tax advisor. (At WellTax, our International Services team is ready to help you interpret treaties and manage withholding tax compliance in whichever jurisdictions you operate.) By taking these steps, you’ll keep your business on track and minimise the friction of international tax obligations.