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If you decide to buy a property overseas, it’s important that you’re aware of the different mandatory taxes.
Most governments from all around the world tax your income in different forms. One of these taxes imposed on your income is called withholding tax.
If you’re an investor who is interested in buying property in other countries to generate income through rent or by selling for a higher price, you may have to pay withholding tax on your rental income or capital gain.
In this article I explain all the essentials you need to know about Withholding tax.
What is Withholding tax?
Withholding tax, also known as retention tax, mostly applies to employment income for residents.
For non-residents, it applies to income generated through rent or the sale of the real estate.
Other income sources that are subject to withholding tax for non-resident foreigners are:
d. Service Fees
Purpose of Withholding Tax
The main purpose of withholding tax is to avoid tax evasion. Non-resident owners are more frequent subject to the withholding tax on rental income to make sure non-residents pay their yearly income tax.
Most countries impose withholding taxes on any payments, in the form of dividends, interests, or rental incomes made to non-residents to make sure the money moving outside the country is properly taxed.
It is easier for non-resident foreigners to avoid taxes on their income as you’re not present in the country where the property is located.
To resolve this issue, the government deducts the withholding tax from your rental income, paid by the tenant.
If the withholding tax is more than the actual income tax, it can be refunded to the person by the government. In many countries, you don’t have to file tax returns if you’re paying withholding tax on your income.
The rate of withholding tax also varies based on the tax treaties between two countries (the country where you live and the country where you own a property).
For example, if the withholding tax is 10% for non-resident foreigners in a particular country, it can be less for you if your country has a tax treaty with that country.
This means, based on the tax treaties between different countries, withholding tax rate or rules may vary based on the nationality of the property owner.
How does Withholding tax work?
Withholding tax is applied mostly on rental income in most countries if the property is owned by the non-resident owner.
Some countries also impose withholding tax on rental income for local owners, but it is normally less than the rate applied to foreign non-resident owners.
In most cases, the taxed amount is less than the total yearly or monthly rent. You can deduct a percentage as expenses (maintenance charges, repairs) from the total amount earned.
For example, in Thailand, the 15% withholding tax is applied to the rental income after 30% deduction as expenses. So only 70% of the rental income is taxed with withholding tax.
Similarly, there is also withholding tax in some countries on the income generated by selling a property.
In such cases, the taxed amount is calculated after the deductions that are based on the time for which you have owned the property.
The more years you own a property, the lesser the taxable amount. Withholding tax in such cases is also proportional to the Capital Gains Tax in that country.
Simply put, if you’re earning income as a non-resident foreigner by owning a property in another country, you’re subjected to income tax in that country.
To ensure that you pay your tax on your income at the end of the taxable year, most countries impose withholding tax that makes sure you cannot evade income tax.
This is why the rates are more for non-residents than residents as it is easier for non-residents to avoid income tax.
When do I need to pay Withholding tax?
If you own a property that generates rental incomes, you usually don’t need to pay the withholding tax to the Government.
Instead, the tenant will pay the tax directly to the Government on a monthly or a yearly basis.
In most cases it is paid yearly.
If you’re paying a withholding tax on selling a property, the buyer has to pay it at the time of transfer of the property.
Do I pay Withholding tax in my country of residence or overseas?
As the withholding on rental income is mostly paid by the tenants or buyers, it can only be paid in the country where the property is located.
Withholding tax is levied by governments on properties to collect revenue for maintenance of the areas. In most cases, rental income taxes are collected as a withholding tax, to make it easier for you.
Otherwise, you have to pay the rental income tax at the end of the year by hiring a lawyer or a tax management company, if you’re not present in that country.
Withholding tax rates for non-resident foreigners in the Asia Pacific region
Let’s have a look at the different withholding tax rates in the Asia Pacific Region.
In Singapore, you only need to pay withholding tax if you get incomes from the sources within Singapore.
If you own a property in Singapore that earns you rental income, you need to pay 15% in withholding tax.
To read more about how you can buy a property in Singapore, I recommend you to read this article.
Hong Kong does not levy withholding tax on rental income, or the income generated if you sell a property.
You only need to pay a withholding tax for a royalty payment.
You need to pay a withholding tax of 10% on your rental income.
Keep in mind that Malaysia also levies an income tax of 25% on rental incomes. When you file your yearly rental income and income tax, the withholding tax is deducted by the government.
Read this article to learn more about how you can buy a property in Malaysia.
In Cambodia, you need to pay 14% withholding tax at a flat rate on rental incomes.
The rate is only 10% for Cambodian residents and local taxpayers.
If you don’t have a spouse or children living in Thailand, you’re subject to 15% withholding tax on rental incomes.
You can deduct 30% of the rental incomes earned as expenses, before you apply the withholding tax.
For example, if the yearly rent is $1000, the taxed amount will be $700, after the deduction of 30% income as expenses.
The background is that 30% should be used to cover costs for maintenance and other expenses to the property.
In case you need to pay more than 30% to cover such property expenses, you can make an application with supporting documents.
In addition, you also have to pay 1% withholding tax on the sales value when selling a property.
You need to pay the 1% withholding tax on capital gain based on the progressive rate, that depends on the time you’ve owned the property and your yearly income.
If you plan to buy a property in Thailand, I recommend you to read this article.
Foreigners are also required to pay a withholding tax when selling the property. You can read more about this here.
In Vietnam, you need to pay a withholding tax called FCWT (Foreign Contractor Withholding Tax).
It is applicable to royalties and interest on loans and few other income sources, but not on rental income.
However, a rental income tax of 20% should be paid by foreigners that rent out their property.
Just like Vietnam, you don’t need to pay withholding tax on rental income in South Korea.
You only need to pay withholding tax on royalties, dividends, interest.
However, foreigners need to pay a rental income tax that ranges between 6 – 40%, depending on how much you’ve earned on rental incomes.
If you’re not a permanent resident in Japan, you have to pay 20.42% tax on your rental incomes in the form of withholding tax or annual income tax, based on the tenants.
If the tenant is a company, your rental income is subject to withholding tax. If your tenant is an individual, you don’t have to pay withholding tax.
Instead, you need to submit the income tax on your own through your accountant or rental management company.
On the other hand, you need to pay a withholding tax of 10.21% on the capital gain if you sell the property.
You don’t need to pay withholding tax in Australia, even though, you need to pay taxes on rental income.
You need to pay withholding tax on interest, loyalties, and dividends.
Under New Zealand’s tax law, you must register as Non-resident withholding tax (NRWT) payer if you’re earning money through interests, royalties, and dividends,.
You don’t have to pay withholding tax on rental income but you have to file a Non-resident Income Tax Return (IR3NR) to pay yearly income tax on rental income.
This is same as in Australia as in both countries, you need to pay rental income tax, but not in the form of withholding tax.
In the United States, you need to pay a withholding tax of 30% on rental incomes.
If you sell a property, you’re subject to a withholding tax of 10%.
The US has tax treaties with many other countries. Therefore, the rate might vary, depending on where you come from..
In Canada, the withholding tax is 25% of the rental income. But the same as it goes in the US, the rate can be lower based on the tax treaties between countries.
When selling a Canadian property, you have to pay an estimate of the capital gain tax before the sale, which equals to 25% of the capital gain.
The CRA issues a certificate against this payment which is called Tax Clearance Certificate.
If you’ve not obtained this certificate at the time of sale, the buyer is required to withhold 33.3% of the gross purchase price. You can read more about how to avoid withholding tax in Canada here.
In the UK, you need to pay withholding tax at a flat rate of 20% on the net rental income. The withholding tax rate is the same as the regular income tax on rental income.
This means you don’t have to pay any additional tax at the end of the year if rental income is your only income.
You don’t have to pay withholding tax on rental income in Spain.
You’ll only have to pay a withholding tax on the income sources like dividends, interest, and royalties.
The rate stretches up to 24%, depending on your country of residence.
On the other hand, if you sell a property, the buyer must withhold 3% of the purchase price as withholding tax that is payable to the public treasury.
You have to pay 28% withholding tax in Portugal, on the rental income. But not all rental income is taxed.
You can calculate the taxable amount after deducting costs for maintenance and repairs of the property if the expenses are documented.
On the other hand, you don’t have to pay withholding tax on the sale of the property to cover capital gains tax.
You have to pay a 20% withholding tax on rental income in Ireland. Your tenants will pay it directly to the government and fill the Form R185 documents as well.
This form is added to your tax returns when you file your yearly income tax.
You also have to pay a 20% withholding tax on incomes such as dividends, interests and royalties.
Withholding tax is common all around the world for non-residents foreigners. It mostly applies to the rental income to make sure the owner of the property is liable to yearly income tax.
In some countries, it also applies to the sale of the property to cover capital gains tax.
Withholding tax is normally paid by the tenant or buyer of the property, as he/she withheld the amount from the agreed amount and pay it to the government.
On the other hand, you may have to look into the country to country tax treaties to learn about the accurate withholding tax you have to pay on your income.