The FASTER Directive European Commission’s proposal to improve withholding tax procedures

 

Introduction

On 19 June 2023, the European Commission published proposed new rules to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries (e.g. banks) and Member State tax administrations. The aim of this initiative – a key element of the Communication on Business Taxation for the 21^st Century, and the Commission’s 2020 Action Plan on the Capital Markets Union – is to promote fairer taxation, fight fraud, and support cross-border investment throughout the EU.

On the publication of the proposed Directive, Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union, said:

“Disjointed and largely paper-based tax procedures are costly and they stifle investment across the Single Market. Retail investors are impacted most, as 70% of them do not reclaim the tax refund to which they are entitled. Besides fighting tax fraud, this proposal eases the burden of claiming back tax by cutting red-tape and making the process simpler and faster, both for investors and tax authorities. This proposal removes an obstacle to creating a single market for capital – and in doing so makes an important contribution to Capital Markets Union.”

 

Scope of the Directive

The Directive applies in respect of publicly traded shares – non-listed equities are out of scope. Member States may also choose to apply the procedures to publicly traded bonds as well.

 

Common EU Digital Certificate of Tax Residence

The Directive proposes to establish a common EU digital certificate of tax residence (“eTRC”). The certificate should contain standard set of information, and be available in both human- and computer-readable format. The certificate should be issued within one working day from application. If this is not possible, the tax authority must inform the person requesting the certificate of the reason for the delay and the additional time needed in order to verify the tax residency of the taxpayer. The eTRC should cover at least the whole calendar year in which it is issued and should remain valid for that period unless the Member State has evidence that the person to which the certificate relates is not resident in its jurisdiction. Other Member States must recognise the eTRC as adequate proof of residence of a taxpayer.

 

Systems of Relief

The Directive provides for two fast-track procedures, to complement the existing standard refund procedures – a “relief at source” procedure and a “quick refund” system. Member States are able to choose which one to use, or to include a combination of both.

Under the “relief at source” procedure, the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules of the double tax treaty provisions.

Under the “quick refund” procedure, the initial payment is made taking into account the withholding tax rate of the country where the dividends or interest is paid, but the refund for any overpaid taxes is granted within 50 days from the date of payment (or 25 days from date of request). If the refund request has not been processed in time, interest will be due and payable by the tax authority.  

 

Reporting

The Directive proposes to introduce a standardised reporting obligation in order to provide tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse. Certified financial intermediaries will have to report the payment of dividends and interest to the relevant tax administration so that the latter can trace the transaction. Such reporting will need to be made within 25 days, and will include information on the payor and payee, as well as certain other information to help identify abusive practices (discussed further below).

 

National Register of Certified Financial Intermediaries

Member States must establish a national and public register of “certified financial intermediaries” or CFIs. Financial intermediaries eligible to be CFIs are credit institutions (as defined in the Capital Requirements Regulation (CRR)), investment firms (as defined in MIFID II) and central securities depositories (within the Central Securities Depositories Regulation) or those providing comparable services in third countries. Registration will be mandatory for all large institutions (as defined in the CRR) that handle payments of dividends and, where relevant, interest on securities originating in their jurisdictions, and central securities depositories that provide withholding tax agent services for such payments.

 

Combating Tax Fraud

As mentioned earlier, one of the key aims of the FASTER initiative is to combat tax fraud. The Cum/Ex and Cum/Cum scandals are cited as examples of how the existing refund procedures can be abused, with tax losses from these practices estimated at €150 billion for the years 2000-2020. Thus, as part of the reporting requirements, CFIs are required to report on whether shares were acquired within two days of the ex-dividend date or whether certain financial arrangements are in place in respect of such equities. These additional reporting requirements apply only in respect of dividend payments, and not for interest. Where either of the foregoing is the case, the fast-track procedures (relief at source and/or quick refund) are switched off, and existing national procedures for the reclaim of excess withholding tax must be followed.    

 

Timing

The Directive is open for feedback for a period of 8 weeks. At the time of writing, the deadline for feedback was 9 September 2023, however feedback period is being extended every day until the proposal is available in all EU languages. Once adopted by Member States, the proposal is expected to come into force on 1 January 2027.

 

 

How BDO can help

We can help you to consider the potential impact arising under the proposals. We are also available to assist with exemption or refund claims under existing procedures.

For more information on this topic, please contact Angela Fleming, Head of Financial Services Tax, or your usual BDO tax contact.