Cross-border tax basics: withholding tax and tax treaties

When you pay royalties to a licensor in another country, taxes may need to be withheld from that payment before it leaves. Tax treaties between countries can reduce or change that withholding, but only if the correct paperwork is in place. Rules vary widely, so this is an area where you should always consult a tax advisor.

Withholding tax is tax that the payer (usually you, the licensee) deducts from a cross-border payment and sends to a tax authority, rather than the recipient paying it later. Royalties are one of the payment types that are often subject to it. Depending on the countries involved and the type of payment, withholding may apply in the licensee's country, and the licensor may also have obligations in its own country.

Tax treaties are agreements between two countries designed to avoid taxing the same income twice. Many treaties reduce or eliminate withholding on royalties, but claiming treaty benefits usually requires documents such as a certificate of tax residency or specific tax forms from the licensor. Without them, a higher default rate may apply.

Questions to sort out early, with a tax advisor:

Does withholding apply to this payment, and in which country?
Is there a treaty, and what documents are needed to use it?
Does the contract say whether payments are "gross" or "net" of withholding?
Could consumption taxes, such as VAT or Japan's consumption tax, also apply?

Rates and rules change, so don't rely on numbers from a blog post or a past deal.