Interest withholding tax is a form of withholding tax under which the payer of interest on a loan, bond or deposit deducts tax from the payment and passes it to the tax authority of the country where the interest arises. It is applied mainly to interest paid to non-residents, as a way for the source country to collect tax from recipients it could not otherwise reach.
Domestic rates vary widely, and many are reduced, often to 10 per cent or to nil, by double taxation treaties; claiming the lower rate is described under tax treaty relief. Many countries also exempt particular instruments to attract investment, as the United States does for portfolio interest and the United Kingdom for quoted Eurobonds. Loan agreements usually contain a tax gross-up clause requiring the borrower to make up any deduction, so the cost falls on the borrower.