What are Withholding Taxes on Software Royalties?
Transactions that permit the use of software in another country may result in a tax by that country. How (or whether) a foreign country taxes a cross-border software transaction involving a U.S. company depends on the specific characteristics of the transaction, whether a tax treaty exists between the United States and the foreign country, and the law of the foreign country. (If a foreign income or withholding tax is lawfully imposed on the transaction and the foreign tax meets U.S. foreign tax credit requirements, the U.S. company may use the foreign tax to offset all or a portion of its U.S. income tax on the transaction.) Characterization of Software Transactions The “characterization” of a software transaction is an important step to determine if a withholding tax obligation will be incurred. There are three basic characterizations for software transactions: sales, royalties, and rentals. If a software transaction is characterized as generating royalties, a withholding tax may be a
Transactions that permit the use of software in another country may result in a tax by that country. How (or whether) a foreign country taxes a cross-border software transaction involving a U.S. company depends on the specific characteristics of the transaction, whether a tax treaty exists between the United States and the foreign country, and the law of the foreign country. (If a foreign income or withholding tax is lawfully imposed on the transaction and the foreign tax meets U.S. foreign tax credit requirements, the U.S. company may use the foreign tax to offset all or a portion of its U.S. income tax on the transaction.) Characterization of Software Transactions The “characterization” of a software transaction is an important step to determine if a withholding tax obligation will be incurred. There are three basic characterizations for software transactions: sales, royalties, and rentals. If a software transaction is characterized as generating royalties, a withholding tax may be a
