Introduction
The President ratified the 2nd Amendment to the Income Tax Act (Law No. 25/2019) on 31 August 2026.
The amendment introduced a substantially broader withholding tax framework for non-resident contractors. In addition to an increase in the applicable withholding tax rate, it significantly expands the scope and application of the non-resident contractor provisions.
In particular, the amendments affect Non-resident Withholding Tax (“NWT”) on payments made to non-resident contractors for the supply of goods, the tax liability of non-resident contractors operating through a permanent establishment (“PE”) in the Maldives, and the classification of payments to non-resident contractors that fall within other specified categories.
Key Takeaway: The 2nd Amendment to the Income Tax Act increases NWT on non-resident contractors from 5% to 10%, expands its scope to include the supply of goods, and treats NWT as a final tax for contractors operating through a PE.
Key Amendments
| AREA | KEY AMENDMENT | DETAILS |
|---|---|---|
| Definition of ‘Non-resident Contractor’ / Contract value subject to NWT | Expanded definition to include the supply of both goods and services | Previous Position: Defined as a non-resident undertaking services in the Maldives. Payments for the supply of goods were excluded and not subject to NWT. Amended Position: Expanded to include both goods and services. Payments for goods are now subject to NWT. In mixed contracts involving goods and services, the full contract value may now be subject to NWT. |
| Non-resident withholding tax (NWT) rate | Rate increased from 5% to 10% | Previous Position: Payments to non-resident contractors were subject to NWT at 5%. Amended Position: Payments to non-resident contractors are now subject to NWT at 10%. |
| Classification of payments | Priority given to non-resident contractor category | Previous Position: Where a payment fell within another specified category (e.g., fees for technical services), it was required to be reported under that specific category. Amended Position: Where a payment could otherwise fall within another specified category, it is treated in its entirety as a payment to a non-resident contractor. |
| Tax liability of non-resident contractors with a PE | Shift to NWT as a full and final tax | Previous Position: A contractor with a PE could elect to treat NWT as final tax or declare income on a net basis and be subject to corporate income tax after allowable deductions and a tax-free threshold of MVR 500,000. Amended Position: NWT on payments to a non-resident contractor with a PE is now treated as final tax, with no option to declare income on a net basis. |
Considerations for Businesses
- Businesses purchasing goods from non-resident suppliers should review arrangements as payments may now fall within NWT provisions.
- Entities entering into mixed contracts must account for NWT potentially applying to the full contract value.
- Payers should review payments that previously overlapped with other specified tax categories.
- Non-resident contractors operating through a PE in the Maldives should evaluate the shift to final tax on gross receipts.
- Businesses should review existing tax gross-up clauses in light of the increased 10% rate.
- Organizations should factor in these changes when pricing and drafting new contracts.
