The Council of the European Union agreed to adopt new regulations for withholding tax procedures under the Council Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER) on Tuesday, 14 May 2024.
Due to the changes the Council made in the Directive during the negotiations, the European Parliament will be consulted again on the agreed text.
The agreed text will go through a legal linguistic check and the directive will then need to be formally adopted by the Council before being published in the EU’s Official Journal and enter into force.
Member states will have to transpose the directive into national legislation by 31 December, 2028, but the national rules will have to become applicable from 1 January, 2030.
The FASTER initiative aims to make withholding tax procedures in the EU safer and more efficient for cross-border investors, national tax authorities and financial intermediaries, such as banks or investment platforms.
Double taxation
Currently, where cross-border investments are concerned, many member states levy taxes on dividends (from equities and shares) and interests (on bonds) paid to investors who live abroad.
At the same time, those investors have to pay income tax in their country of residence on the same income.
Although treaties between member states aim to solve the issue of double taxation, in reality the procedures to claim withholding tax relief vary considerably from one member state to another, which results in relief or refund procedures being lengthy, costly and cumbersome.
These procedures can also be vulnerable to large-scale tax fraud.
The withholding tax initiative will make tax relief procedures faster, simpler and, at the same time, safer.
Common tax residence certificate
The directive will introduce a common EU digital tax residence certificate (eTRC) that tax paying investors would be able to use in order to benefit from the fast-track procedures to obtain relief from withholding taxes.
Member states will provide an automated process to issue digital tax residence certificates (eTRC) to a natural person or entity deemed resident in their jurisdiction for tax purposes.
Fast-track procedures
The directive allows member states to have two fast-track procedures complementing the existing standard refund procedure for withholding taxes. This will make relief and refund processes faster and more closely harmonised across the EU.
Member states will have to use one or both of the following systems:
- A “relief-at-source” procedure where the relevant tax rate is applied at the time of payment of dividends or interest.
- A “quick refund” system where the reimbursement of overpaid withholding tax is granted within a set deadline.
The Council agreed that member states must apply the fast-track procedures if they provide relief from excess withholding tax on dividends paid for publicly traded shares.
Member states will have an option to maintain their current procedures, and not apply Chapter III of the Directive, if:
- They provide a comprehensive relief-at-source system applicable to the excess withholding tax on dividends paid for publicly traded shares issued by a resident in their jurisdiction and their market capitalization ratio is below a threshold of 1.5% (as reported by ESMA).Nevertheless, if this ratio is exceeded for four consecutive years, all rules foreseen by the Directive will become irrevocably applicable. In such cases, member states will have five years to transpose the rules of the Directive into national law.
- They provide relief from excess withholding tax on interest paid for publicly traded bonds.
The Council also introduced in the text additional circumstances in which member states may exclude, completely or partially, requests for withholding tax relief from the fast-track procedures to perform further checks and prevent fraud.
The Council added provisions to the text regarding indirect investments for cases where the investor does not invest directly in insecurities but through a collective investment undertaking.These provisions ensure that
legitimate investors such as certain collective investment undertakings or their investors have access to the fast-track procedures.
Under the new rules, certified financial intermediaries requesting relief on behalf of a registered owner will need to carry out due diligence regarding the registered owner’s eligibility to benefit from tax relief.
Standardised reporting for financial intermediaries
The directive will set a standardised reporting obligation for financial intermediaries (like banks or investment platforms). This will make it easier for national tax authorities to detect potential tax fraud or abuse.
Member states will establish national registers where large (and optionally smaller) financial intermediaries will have to register to be certified.
In order to simplify this registration procedure, the Council agreed to create a European Certified Financial Intermediary Portal.
This portal will act as a central dedicated website where the national registers will be accessible.
Member states will retain the necessary discretion when it comes to registering and removing certified financial intermediaries in specific cases and to adopting measures that concern them.
Once registered the financial intermediaries will need to report the necessary information to the relevant tax authorities so that the transaction can be traced.
Member states will have the option of requesting more extensive reporting in relation to transactions with a view to detecting possible cases of tax abuse or fraud.
The Council added the possibility of indirect reporting in addition to direct reporting.
Where the reporting is direct, a certified financial intermediary is to report directly to the competent authority of the source member state.
Where the reporting is indirect, the information is to be provided by each of the certified financial intermediaries along the securities payment chain.
The Council agreed that penalties should be imposed by member states where obligations stemming from this directive are not complied with.
