As published on: dentons.com, Friday 23 June, 2023.
On 19 June 2023, the European Commission published a consultation on the draft proposal for the Council Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER). The current dividend and interest withholding tax refund procedures are lengthy, unclear and differ from country to country. This results in a discouragement of cross-border investments within and into the European Union. The Commission therefore proposes a uniform relief procedure in order to make the refund procedure faster and clearer and to curtail tax fraud and abuse.
FASTER will only apply to securities—publicly traded shares and bonds. In general, dividend and interest payments on securities are subject to withholding taxes at source and to income tax in the dividend/interest recipient’s residency jurisdiction. Source jurisdictions may provide for lower withholding tax rates, or even exemptions based on bilateral tax treaties or domestic laws on the prevention of double taxation.
FASTER obliges member states to implement a national register of financial intermediaries and a common EU digital tax residency certificate. Member states must either implement a relief-at-source system or a quick-refund system.
Member states must establish a national and public register of certified financial intermediaries (CFIs), which must be updated monthly. Large financial intermediaries (as defined in the Capital Requirements Regulation (EU) No. 575/2013) and central securities depositaries that provide withholding tax agent services will be required to join the national registers of the member states where the securities’ issuers are located and of the member states where any of their clients have invested in. Non-EU and smaller EU financial intermediaries are able to join the national registers on a voluntary basis.
The standardized reporting introduces the obligation for every registered CFI throughout the securities payment chain to report a defined set of information to the source member state. The reporting includes information about the CFI itself, the final taxpayer receiving the dividend/interest payment, the payor of the dividend/interest payment and information regarding the payment and possible abusive schemes.
Member states must issue EU Digital tax residency certificates (eTRC) An eTRC must be requested and provided online, via an automated system. The eTRC should be provided within one day. The eTRC provides for a fast, easy and secure administrative process to confirm EU taxpayers’ tax residency. The eTRC must include common content identifying the requesting taxpayer and confirming that they are resident in the respective member state according to its national rules.
The relief-at-source system allows for the application of reduced withholding tax rates based on bilateral tax treaties and national rules, which are applied directly at the moment of the dividend and/or interest payment. CFIs maintaining a registered owner’s investment account may apply this system on behalf of and after being authorized by the registered owner (i.e. a natural or legal person that is entitled to receive dividend or interest income from securities subject to tax withheld at source in a member state).
The quick-refund system ensures that tax refunds are completed within a defined timeframe. CFI’s maintaining a registered owner’s investment account may request a quick refund of the excess withholding tax on behalf of (and after being authorized by) the registered owner within 25 days from the day of the payment. The member states must process refund requests within 25 calendar days from the date of the request. If the refund request has not been processed in time, interest will be due after the 25th day.
In order to apply the relief-at-source and/or the quick-refund system, the CFI must verify and establish that the registered owner is eligible for the relief and must, among other things, verify that the registered owner is the beneficial owner of the dividend/interest under the national law of the source member state.
In order to combat fraud/abuse, member states do not provide relief under the relief-at-source system or the quick refund system if either of the following are true:
In those cases, the existing, national procedures must be used.
The FASTER proposal is still open for feedback until 15 August 2023. All feedback will be summarized by the European Commission and presented to the European Parliament and European Council. If the proposal is adopted, member states will be obliged to adopt the FASTER directive by 31 December 2026. The entry into force date of the provisions will be 1 January 2027.
In our experience, refund requests or exemption requests of source taxation is more often than not a lengthy and cumbersome process, with different procedures and requirements depending on the legal basis of the refund or the type of refund, even within the same country. This proposal is a welcome step forward in allowing investors to effectively obtain the exemptions and refunds they are entitled to.
Dentons is happy to assist you in determining the potential impact of this proposal and/or submitting your comments to this consultation. We are also able to assist with existing exemption or refund procedures.