Withholding tax rates in action: how the cost increases when your customer has to gross-up

When your customer has to withhold tax from your fee, someone has to bear that cost. If your contract has a gross-up clause, your customer agrees to pay you more, so that after the tax is withheld you still receive your full fee.

Grossing up costs more than the withholding tax rate. The customer has to pay the tax on the extra amount too. The formula is: gross payment = your fee ÷ (1 − withholding tax rate).

An example: your fee is €100 and the withholding tax rate is 20%. Your customer pays €125, withholds €25 and you receive €100. The customer's cost has gone up by 25%, not 20%. At 10% the cost goes up by 11.1%, and at 30% it goes up by almost 43%.

Why it matters: the higher the rate, the faster the cost rises. That's why it pays to check whether a tax treaty can reduce the rate before you agree your price and contract.

Try it with your own numbers: use the withholding tax calculator to work out what to invoice.