Several countries have entered into double taxation treaty agreements regarding taxation of income. These treaties allow eligible residents and corporations, who are domiciled in one of the treaty countries, to benefit from a lower rate of taxation from the other treaty country or market of investment. The primary driver that determines the applicable tax rate for an entity receiving income is the country where the investing entity is legally domiciled, and the country of origin of the financial instrument.
Withholding taxes generally take on three forms:
- Reduction at the source. The investing entity is withheld based on the account opening information provided (for example, legal domicile, entity type).
- Reduction at source via documentation. Requires investing entities to submit documentation that proves legal residency, within the meaning of the double taxation treaty, in order to benefit from a reduced withholding rate at the source. Submission of this documentation allows the investing entity to benefit from the treaty rate, which is generally lower than the statutory (standard) rate applicable for that market. Entities not completing this documentation are eligible only for the statutory rate at the time of the income payment.
- Reclaim markets. Clients are taxed at a higher rate of withholding, but can reclaim excess withholding taxes based on their legal domicile and entity type.
The determination about whether an entity has met the documentation standard for a particular market where a treaty is recognized must be made at the entity setup level. This determines the entity's eligibility for reduced treaty rates in documentation markets. For each unique taxable condition, you must maintain withholding rates and recoverable rates for both treaty and statutory circumstances.
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