Definition
Withholding tax is a mechanism for collecting income tax at source. Instead of the recipient being responsible for paying it later, the payer withholds a percentage at the moment of payment and sends it to the tax authority. The recipient gets a certificate of withholding that reduces their final tax bill.
Common contexts: — Cross-border payments (royalties, interest, dividends, service fees) where the source country taxes the foreign recipient — Freelancer and professional services in many Latin countries — e.g. Spain's IRPF withholding (15% typical, 7% first two years), Italy's ritenuta d'acconto (20%), Mexico's ISR withholding (10%) — Employer payroll — employers withhold income tax from salaries and remit it — Rental income in many jurisdictions
Double taxation treaties often reduce the withholding rate between two countries. A freelancer in one country supplying services to a client in another may be entitled to a reduced rate if both countries have a treaty and the paperwork is in order.
On the invoice, the withholding is usually shown as a negative line after the subtotal: "Gross amount − Withholding at X% = Net payable."
A Spanish freelancer invoices a Spanish client €1,000 + 21% VAT = €1,210 gross. IRPF withholding at 15% on the €1,000 professional fee = −€150. Net to the freelancer: €1,060. The client remits €150 to Hacienda.