Income Tax Bill Proposes Significant Changes to Non-Resident Contractor Payments

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On 16 August 2026, the Government submitted to the People’s Majlis the Bill on Second Amendment to the Income Tax Act (“ITA”). The proposed amendment introduces significant changes to the taxation of non-resident contractor (“NRC”) payments, including an increased non-resident withholding tax (“NWT”) rate, an expanded definition of NRCs and mandatory gross-basis taxation for NRCs.

Rate Increased to 10%

The Bill proposes to amend section 55(b) of the ITA to increase the NWT rate applicable to NRC payments from 5% to 10%.

Expansion of Definition to Include Goods

The definition of an NRC is also proposed to be broadened. While the existing definition principally covers the performance or provision of services in the Maldives, the revised definition would extend to a non-resident person who, under a contract, agreement or arrangement (other than as an employee), undertakes:

  • To supply goods or services in the Maldives, or
  • To supply the use of, or right to use, goods or services of another person in the Maldives.

The inclusion of goods potentially expands the scope of the NRC regime considerably and raises questions regarding the territorial nexus required for a contract to fall within the provision.

In particular, further clarity may be required on what constitutes goods or services being supplied “in the Maldives” and the treatment of mixed contracts involving offshore goods and services performed in the Maldives. For example, it remains unclear whether a limited service element performed in the Maldives is intended to bring the entire contract, including goods supplied offshore, within the scope of the NRC regime.

NRC Treatment to Take Priority

The Bill also clarifies the interaction between NRC payments under section 55(b) of ITA and the other categories of payments subject to NWT under section 55(a). Where a payment falls within the NRC provision, it would be treated as an NRC payment even if it could also fall within another category under section 55(a) of the ITA.

  • For example, where a person doing business in Maldives engages an overseas surveying firm to perform a site survey in the Maldives, the payment may, by its nature, constitute fees for technical services. However, as the arrangement falls within the NRC definition, the payment would instead be treated as an NRC payment under section 55(b) of the ITA.

Mandatory Gross Basis Taxation

A particularly significant change is the proposed introduction of section 27(c) to the ITA. Under the existing framework, a PE may generally be taxed on a net basis, under which income attributable to the PE is included in taxable income and allowable expenses are deducted in determining taxable profit. Where NWT has suffered on qualifying income, PEs had the option to elect to treat the NWT as the final tax, effectively adopting a gross-basis treatment for that income – adopting gross basis for NWT suffered income was not mandatory.

Generally, filing tax returns on a net basis is beneficial for construction and other cost-intensive contracts, where significant portions of contract revenue may be absorbed by materials, subcontractors, labour and other project costs. Tax is therefore determined based on the contractor’s taxable profit rather than its gross receipts.

The proposed section 27(c) would remove this choice for income falling within the ambit of NRC payment. NWT deducted from NRC payments would be treated as the final tax, with no deductions permitted against that income. Gross-basis taxation would therefore become mandatory for such NRC income leading to a significantly higher effective tax burden than under the net-basis treatment.

Key Takeaway

If enacted, the changes could materially affect non-residents undertaking projects in the Maldives, particularly those in the construction and other low-margin or cost-intensive sectors.The combined effect of the broader NRC definition, the increased 10% NWT rate and mandatory gross basis taxation may significantly alter the tax cost of cross-border contracts.

Businesses should therefore review existing and proposed arrangements involving non-resident contractors, particularly mixed goods and services contracts and contracts undertaken through a PE in the Maldives.