Withholding Tax in GMC: Interest, Royalties, Management Fees, Director Fees and Real Property

Summary

• A person paying interest to someone "not known ... to be resident in GMC" must deduct tax at 15%, or at the 10% or 5% rate in s. 43(3) or (3A) where those apply (Income Tax Act 2025, s. 45(1)).
• The same mechanism applies to royalties, know-how payments, management fees and movable-property rent under s. 12(7) (s. 45A), non-resident director's remuneration at 15% (s. 45B), non-resident professionals at 15% (s. 45F), REIT distributions (s. 45G) and public entertainers at 15% (s. 45GA).
• On a disposal of GMC real property by a non-resident whose gain is trading income, the buyer or the buyer's advocate and solicitor must deduct 15% of the consideration (s. 45D).
• Tax deducted must be paid by the 15th day of the second month after payment; late payment attracts a 5% penalty plus 1% per month up to 15% (s. 45(4)).
• Employers deduct tax at source only from employees who are Bhutanese citizens resident in GMC (s. 44B).
• Approved foreign loans (s. 43Y) and approved royalties, fees or contributions (s. 43Z) can be exempted or taxed at a concessionary rate by letter of approval; no approval after 31 December 2030.

What withholding tax is in GMC

The Gelephu Mindfulness City Special Administrative Region (GMC) collects tax on certain payments to non-residents at source. The payer deducts tax, gives notice to the Comptroller of Income Tax and pays the amount over (Income Tax Act 2025, Part 12, ss. 44B to 45J). Every amount deducted "is a debt due from the first-mentioned person to the GMCA" (s. 45(1)). "$" means United States dollars (s. 2AA).

The trigger in most sections is that the recipient is "not known to the first-mentioned person to be resident in GMC". A company is resident if the control and management of its business is exercised in GMC; an individual if he or she resides in GMC or is present or employed there for 183 days or more in the preceding year (s. 2(1)). A payer who does not know the recipient is resident must withhold.

Interest: section 45

Section 45(1) applies where a person is liable to pay interest chargeable to tax to a person not known to be resident in GMC. The rates are:

Section 43(3) levies 10% on the gross amount of s. 12(6) income (interest and other payments connected with a loan) and, subject to s. 43(3A), on the payments in s. 12(7)(a), (b) and (d), where the recipient is a non-resident whose income is not from a GMC trade and not effectively connected with a GMC permanent establishment. Section 43(3A) levies 5% on s. 12(7)(a) and (b) payments on the same conditions. Both exclude the incomes in s. 43(7).

Interest is GMC-source under s. 12(6) where it is borne by a GMC resident or permanent establishment, deductible against GMC income, or the loan funds are used in GMC. Section 12(6A) carves out loan arrangement or guarantee services performed outside GMC by a non-resident with no GMC presence.

The designated officer may by rules substitute a higher or lower rate, "including 0%" (s. 45(1C)), and the Comptroller may by notice require a different rate or "permit such interest to be paid without deduction of tax" (s. 45(2)(b)). Interest credited or capitalised is deemed paid (s. 45(8)(b)). Interest paid to a GMC branch of a foreign company is excluded (s. 45(9)(c)). Qualifying debt securities are excluded under s. 45(9)(a) and (b).

Royalties, management fees and other section 12(7) payments: section 45A

Section 45A(1) applies s. 45(1) to (8) to "any income referred to in section 12(6) or (7)" paid to a person not known to be resident in GMC, with references to s. 43Y read as references to s. 43Z. Section 12(7) deems the following to be GMC-source where borne by a GMC resident or permanent establishment or deductible against GMC income:

• royalties for the use of movable property (s. 12(7)(a));
• payments for the use of, or assistance with, scientific, technical, industrial or commercial knowledge (s. 12(7)(b));
• payments "for the management or assistance in the management of any trade, business or profession" (s. 12(7)(c)); and
• rent for the use of movable property (s. 12(7)(d)).

The carve-outs in s. 12(7A) matter for cross-border services. Technical assistance and management services "performed outside GMC" by a non-resident with no GMC business or permanent establishment are not GMC-source, nor are payments for the use of software, information or digitised goods where no right to exploit the copyright commercially is granted (s. 12(7A)(c)). Ship charter payments (s. 45A(2D)) and payments to a GMC branch of a foreign company (s. 45A(2E)) are excluded. Qualifying debt securities are excluded under s. 45A(2), (2B) and (2C). The rate is 15%, the s. 43(3) or (3A) rate for a passive non-resident, or the s. 43Z rate for approved royalties.

Non-resident director's remuneration: section 45B

Section 45B applies s. 45 to "the payment of any remuneration by a company to any director of the company who is not resident in GMC", at a fixed rate of 15% (s. 45B(2)). The short-term visiting employee exemption in s. 13(6) does not extend to "the emoluments received by a director of a company" (s. 13(7)(a)), so it cannot be used to avoid withholding on board fees.

Real property: section 45D

Where a non-resident's income from the disposal of real property is chargeable under s. 10(1)(a) (that is, as trading income), a "designated person" must, before paying any part of the consideration, "immediately deduct therefrom tax at the rate of 15% on every dollar of such payment" (s. 45D(1)). The designated person is the advocate and solicitor acting for the buyer, or, if none, the buyer (s. 45D(6)).

The amount must be paid by the 15th day of the second month after the deduction (s. 45D(2)), with notice through the electronic service (s. 45D(2A)). Joint owners are presumed to share proceeds equally until the contrary is proved (s. 45D(5)). Payments to a GMC branch of a foreign company are excluded (s. 45D(5A)).

Section 45D therefore does not bite on every sale of land by a non-resident, only where the gain is trading income. That is a question of fact which sellers should address early.

Professionals, foreign firms and public entertainers: sections 45F and 45GA

Section 45F applies s. 45 to GMC-source income from a profession or vocation paid to an individual not resident in GMC whose principal place of business is outside GMC, or to a "foreign firm" (s. 43(10)), at 15% (s. 45F(2)), matching the charge on gross income under s. 43(4). Public entertainers are covered by s. 45GA, also at 15% (s. 45GA(2)), on income net of expenses the payer reasonably believes were incurred in producing it (s. 45GA(2B)).

REIT distributions: section 45G

A REIT trustee must deduct tax from distributions to any person not known to be an individual, a GMC-incorporated and resident company, an approved GMC branch or a GMC body of persons (s. 45G(1)(b)), at "the applicable rate specified under section 43(1)" (s. 45G(3)), unless the trustee has already paid tax on the income distributed (s. 45G(4)).

Employees: section 44B

Section 44B requires an employer to deduct tax at the s. 42 rates from wages, salary, commission or bonus paid to "an individual referred to in section 42", that is, a Bhutanese citizen resident in GMC taxed at the progressive rates in Part A of the Second Schedule. Employees who are not Bhutanese citizens are taxed at 0% to 31 December 2030 (s. 43(1)(ba)) and are outside s. 44B. The notice, payment and penalty machinery mirrors s. 45 (s. 44B(3)–(10)).

Notices, deadlines and penalties

The mechanics are the same across ss. 45, 45A, 45B, 45F, 45G and 45GA.

1. Deduct the tax from the payment (s. 45(1)(a)).
2. "Immediately give notice of the deduction" using the electronic service, unless the Comptroller permits another method (s. 45(1)(b), (1B)).
3. Pay the amount by the 15th day of the second month following the month of payment, or another date the Comptroller allows (s. 45(4)(a), (2)(a)).

Late payment attracts a penalty of 5% of the tax and, after a further 30 days, 1% for each completed month, capped at 15% (s. 45(4)). An undeducted amount is a debt due to the GMCA (s. 45(3)). Deducting but failing to notify in time is an offence carrying a penalty of three times the tax and a fine not exceeding $10,000 or imprisonment not exceeding three years or both (s. 45(5)). The Comptroller may compound offences and remit penalties (s. 45(7)). Where the GMCA is the payer, the debt and penalty provisions do not apply (s. 45J).

Set-off and refunds: section 46

Tax deducted under ss. 45, 45A, 45B, 45D, 45G, 45GA or 44B is set off against the tax charged when the income is included in the recipient's chargeable income (s. 46(1)). Where the final liability is lower, s. 93 entitles a person who has paid tax "by deduction or otherwise" in excess of the amount payable to a refund, claimed within four years from the end of the year of assessment. That is how a non-Bhutanese individual taxed at 0% under s. 43(1)(ba) but subject to 15% deduction under s. 45B recovers the excess.

Reducing or removing withholding

Approved foreign loans: section 43Y

A company that has obtained, or wishes to obtain, a loan from a foreign lender under credit facilities "for the purchase of productive equipment for the purposes of its trade or business" may apply to the designated officer for approval (s. 43Y(2)). If satisfied that approval is expedient in the public interest, the officer issues a letter specifying an exemption or a concessionary rate on the interest (s. 43Y(1), (3)). No loan may be approved after 31 December 2030 (s. 43Y(4)). On revocation for breach, the tax that would have been deducted becomes a debt due to the GMCA (s. 43Y(6)), subject to waiver where the company did not knowingly contravene (s. 43Y(7)).

Approved royalties, fees or contributions: section 43Z

Section 43Z is the equivalent for "royalties or technical assistance fees or contributions to research and development costs" payable by a company "engaged in any industry" to a non-resident (s. 43Z(2)), with the same letter of approval, 31 December 2030 cut-off and revocation rules (s. 43Z(3)–(7)).

Gazette exemptions under section 13(4)

The designated officer may by Gazette notification exempt, wholly or in part, any s. 12(6) or (7) payment made for a purpose that "will promote or enhance the economic or technological development of GMC" (s. 13(4)). If the exemption is revoked or its conditions breached, the tax is deemed deducted and becomes a debt due from the payer (s. 45AA).

Double taxation arrangements

An avoidance of double taxation arrangement declared under s. 49 has effect "despite anything in any written law" (s. 49(1)). Whether one applies must be checked case by case (see our guide to double taxation relief for GMC companies).

Practical checklist / Next steps

1. Classify every cross-border payment under ss. 45, 45A, 45B, 45D, 45F or 45GA.
2. Establish whether the recipient is known to be resident in GMC, and keep evidence.
3. Check the source rules in s. 12(6) and (7) and their carve-outs.
4. Identify the rate: 15% by default; the s. 43(3) or (3A) rate for passive non-residents; a s. 43Y or 43Z rate where a letter of approval exists; another rate where rules under s. 45(1C) or a notice under s. 45(2)(b) provide.
5. Deduct, notify through the electronic service and pay by the 15th day of the second month.
6. Record deductions so recipients can claim set-off (s. 46) or a refund (s. 93).
7. For equipment financing or technology licences, consider s. 43Y or s. 43Z before 31 December 2030.

Frequently asked questions

What is the withholding tax rate on interest paid from GMC?

Section 45(1) sets 15%, but directs the payer to use the s. 43(3) rate of 10% where the recipient is a non-resident whose interest is not connected with a GMC trade or permanent establishment, or a s. 43Y rate where a letter of approval exists. Rules under s. 45(1C) may substitute other rates, including 0%.

Do I withhold on management fees paid to an overseas parent?

Management fees are within s. 12(7)(c) and so within s. 45A if borne by a GMC resident or deductible against GMC income. However, s. 12(7A)(b) removes management services "performed outside GMC" by a non-resident with no GMC business or permanent establishment, so no withholding arises where the services are performed abroad.

Must a GMC company withhold on fees paid to a non-resident director?

Yes, at 15% (s. 45B). A non-Bhutanese director taxed at 0% under s. 43(1)(ba) may claim a refund of the excess under s. 93.

When does the buyer of GMC property have to withhold?

Only where the seller is not known to be resident in GMC and the gain is chargeable as trading income under s. 10(1)(a). The buyer's advocate and solicitor, or the buyer, deducts 15% of the consideration (s. 45D(1)).

Key takeaways

• GMC withholding applies to interest, royalties, know-how and management fees, movable-property rent, director's fees, professional and entertainer fees, REIT distributions and certain property sales by non-residents.
• The default rate is 15%; the 10% and 5% rates in s. 43(3) and (3A) apply to passive non-residents; ss. 43Y, 43Z, 45(1C) and 13(4) can reduce or remove it.
• Payment is due by the 15th day of the second month; late payment carries 5% plus 1% per month, and non-notification is an offence.
• Services performed outside GMC by non-residents without a GMC presence fall outside s. 12(6) and (7).

This article is general information about the law of the Gelephu Mindfulness City Special Administrative Region as at the date above. It is not legal advice and does not create a lawyer–client relationship.

You may contact Basnet Law at basnet@basnetgmc.com or office@basnetgmc.com for any legal queries related to GMC.

References

• Income Tax Act 2025 (Law No. 6 of 2025), ss. 1(3), 2(1), 2AA, 3(1), 10(1)(a), 12(6), 12(6A), 12(7), 12(7A), 13(4), 13(6), 13(7), 42, 43(1), 43(3), 43(3A), 43(4), 43(7), 43(10), 43Y, 43Z, 44B, 45, 45A, 45AA, 45B, 45D, 45F, 45G, 45GA, 45J, 46, 49, 93, Second Schedule Part A