Withholding Tax Traps in Timor-Leste

Under the taxation law in Timor, certain income payments and income relating to certain activities or services is taxed when it is paid or received. Some of these payments are required to be withheld from the income payment and remitted to the National Directorate of Domestic Revenue (NDDR). Below shows a summary of these payments and their tax rate respectively.

Type of income	Withholding rate	Final/non-final tax
Royalties	10%	**Not final if the payer is an individual or individual enterprise
Rent from land and buildings	10%	**Not final if the payer is an individual or individual enterprise
Income from prizes and lotteries	10%	Final
Income from construction and building activities	2%	Final
Income from construction consulting services including project management, engineering design and site supervision services	4%	Final
Income from the provision of air or sea transportation services	2.64%	Final
Income from mining and mining support services	4.5%	FInal
Income paid to non-residents without a permanent establishment in Timor-Leste	10%	Final

For income other than royalties and rent, as the payer would be required to withhold the amount and remit to the NDDR in their Consolidated Monthly Tax Form, the income is final, meaning the recipient of the income would not be required to declare the income in their annual tax return. However, it is more complicated when it comes to rental income and royalties.

Rent

If the payer (tenant) is legal persons (i.e. companies, partnerships, non-incorporated associations, etc.), the payer (tenant) is required to withhold tax from the gross amount of the rent or lease paid at the rate of 10% in the Consolidated Monthly Tax Form. Subsequently, if the recipient is a legal person, the rental income should be declared in the recipient’s annual income tax return and a credit may be claimed for the amount of tax withheld. If the recipient is a natural person, no further tax is payable on income that has been subject to withholding tax in Timor-Leste. Below is an example from MoF.

Joao, a resident of Timor-Leste, leases a building to Timor Investments for $1,500 per month. Timor Investments is a branch (permanent establishment) of an Australian company, Territory Investments Pty Ltd. As Territory Investments Pty Ltd is a non-individual enterprise they are required to withhold 10% of the gross lease payment each month and to remit this amount to the NDDR by the 15th day of the following month.

As Joao is an individual, the amount withheld is a final withholding and the lease payment is not declared in his tax form.

If the payer (tenant) is natural persons (i.e. an individual or an individual business enterprise) or where the payer is the United Nations or one of its specialized agencies, the recipient will have to self withhold 10% of the rental payment and remit to NDDR in their Consolidated Monthly Tax Form. Below is an example from MoF.

Agusto and Benvinda, are a partnership that is a resident of Timor Leste. The partnership rents a house to Bernardo for $500 per month. As the tenant is an individual, Agusto and Benvinda (i.e. the partnership) must self withhold the 10% withholding tax at the time they receive the rent payment each month and remit the tax to the NDDR by the 15th day of the following month.

From 1st July 2002 for Augusto and Benvinda (i.e. the partnership is a legal person), the total rent must be declared in the income tax return and a credit may be claimed for the amount withheld

A common mistake is that the recipients fails to identify the the entities that they are dealing with, and both the payer and the recipient withhold 10% and remit to the NDDR. Taxpayers should keep in mind the difference treatments of withholding tax, and act accordingly.

Royalties

If the payer is legal persons (i.e. companies, partnerships, non-incorporated associations, etc.), the payer is required to withhold tax from the gross amount of the royalties paid at the rate of 10% in the Consolidated Monthly Tax Form. Subsequently, if the recipient is a legal person, the royalties should be declared in the recipient’s annual income tax return and a credit may be claimed for the amount of tax withheld. If the recipient is a natural person, no further tax is payable on income that has been subject to withholding tax in Timor-Leste

However If the payer is natural persons (i.e. an individual or an individual business enterprise), the recipient will have to self withhold 10% of the rental payment and remit to NDDR in their Consolidated Monthly Tax Form.