What happened to my margin? How withholding tax can decimate your profit margin

Withholding tax is charged on your revenue, not on your profit. So a 10% withholding tax doesn’t take 10% of your profit. On a typical margin, it can take most of it.

Why the tax credit doesn’t fix it. At home you can usually credit the withholding tax against your tax on that income. But the credit is capped at your own tax on the profit. Any withholding tax above that cap is lost.

An example: you invoice €100 and your costs are €85, so your profit is €15, a 15% margin. Your customer withholds 10%, which is €10. Your own tax at 25% is €3.75, so that’s the most you can credit. The other €6.25 can’t be credited. Instead of €11.25 profit after tax, you’re left with €5.

Why it matters: the lower your margin, the harder withholding tax hits. That’s why it pays to check whether a tax treaty can reduce the rate, or to build the cost into your price, before you agree your contract.

Try it with your own numbers: use the withholding tax calculator to see what to invoice so withholding tax doesn’t come out of your margin.