The Second Amendment (“Amendment”) to the Income Tax Act (“ITA”) was ratified by the President on 31 August 2026. The Amendment brings significant changes to rules applicable to non-resident contractors (“NRC”) – non resident entities who conduct activities in the Maldives under a contract, agreement or arrangement other than as an employee.

What changed?

The Amendment primarily brings major 3 changes to the existing Law:

1. Increase in the tax rate applicable to NRC
2. Change in the NRC definition
3. Priority to NRC category
4. Gross basis of taxation on NRCs with Permanent Establishment

1. Increase in the tax rate applicable to NRC

Prior to the First Amendment to the ITA, payments made to NRCs were taxed at 10% on the contract’s gross amount^{1Section 55(a)(9) of the ITA before the First Amendment.}. However, with the First Amendment to the ITA, Section 55(a)(9) of the ITA was repealed. Under the First Amendment to the ITA, the taxable percentage on the contract value was reduced to 5%^{2Section 55(b) of the ITA before the Second Amendment.}. Under the recent Amendment, the taxable percentage on the contract value is now increased back to 10%.

2. Change in the NRC definition

Via the First Amendment, the definition of NRC was limited to only include service^{3Section 55 (c) (3) of the ITA before the Second Amendment} component. Under the current Amendment, the scope of NRC definition includes “goods and services”. The change in definition increases the tax base considerably.

Further clarity may be required regarding what constitutes the supply of goods or services in the Maldives, particularly in relation to mixed contracts involving goods supplied offshore and services performed in the Maldives.

Example

Consider a foreign engineering firm contracted to build a water and sewerage system for USD 15 million, of which USD 10 million covers imported pipes, pumps, and treatment equipment, and USD 5 million covers design and installation work carried out in the Maldives.

	Before the Amendment	After the Amendment
Tax base	Services – USD 5,000,000	Services – USD 5,000,000 Goods  – USD  10,000,000
Tax rate	5%	10%
Tax amount	USD 250,000	USD 1,500,000

As per the rules prior to Amendment, 5% withholding tax will be applied only on the service portion of USD 5 million – resulting in a withholding tax liability of USD 250,000. Following the Amendment, the revised 10% rate will be applicable on the full contract value of USD 15 million – resulting in a withholding tax liability of USD 1.5 million.

3. Priority to NRC category

Where the payment subject to withholding tax type falls to more than one category specified in the Section 55(b) of the ITA, priority would have to be given to the NRC category. This means, for instance, a payment that can be classified as technical service, paid to NRC, would have to be taxed under the NRC category and not fees for technical service.

4. Gross basis of taxation on NRCs with Permanent Establishment

With the Amendment, withholding tax paid on NRC payments will be considered as the final tax, regardless whether the NRC has a Permanent Establishment in Maldives or not. Prior to the Amendment, the NRC PEs had the option to submit a final Income Tax Return and claim allowable deductions in accordance with the ITA. 

Effects on existing contracts

The Amendment does not provide grandfathering for existing contracts. Meaning from the effective date (31 August 2026) of the Amendment, NRCs would have to follow the new rules. Accordingly, it is advisable to seek legal guidance to review the agreement in light of NRC rule changes to determine which contracting party should take the increase in cost due contractually. 

Next steps?

Below are some of the actions, which NRCs could take into consideration:

• Review the NRC contracts for cost-allocation and gross-up clauses, and assess who bears the increased withholding cost under the existing wording
• Identify payments that may now be recharacterised as NRC payments under the priority rule.
• Confirm withholding agent obligations are updated to reflect the new 10% rate and the expanded goods and services base
• Assess whether double taxation treaty relief may be available where the contractor is resident in a treaty jurisdiction.
• Seek professional tax and legal advice promptly, given the Amendment applies with immediate effect and no transitional relief.

It is advisable to seek professional guidance to ensure compliance and mitigate potential risks. If you have any questions relating to NRC and other accounting and tax related matters, please email us at [email protected]

Article Contributors

Aminath Faiha Shareef, Associate
Hassan Shah, Assistant Director

References

1. Section 55(a)(9) of the ITA before the First Amendment. ↑
2. Section 55(b) of the ITA before the Second Amendment. ↑
3. Section 55 (c) (3) of the ITA before the Second Amendment ↑