Background
As a reminder, on 19 June 2023, the European Commission released a proposal for a Council Directive on Faster and Safer Relief of Excess Withholding Taxes (“FASTER Proposal”) laying down rules on the issuance of a digital tax residence certificate by EU Member States and the procedure to release any excess withholding tax (“WHT”) that can be withheld by an EU Member State on dividends from publicly traded shares and, where applicable, interest from publicly traded bonds paid to registered owners who are resident for tax purposes outside that EU Member State. On 14 May 2024, the Council of the European Union (“Council”) reached an agreement on the FASTER Proposal.
In the EU, investors face double taxation on income from securities (dividends and interest) in cross-border situations as:
- taxes may be withheld in the source country as WHT.
- taxes may also be levied in the residence country of the investors as income tax.
Double tax treaties between countries as well as certain domestic legislations aim to alleviate this by allowing reduced WHT rates or exemptions in the source country. The reduced WHT rate or exemption is either applied directly at the point in time when the dividend/interest is paid (relief at source) or is refunded pursuant to a reclaim by the investor (refund procedure). As, on the one hand the current WHT procedures are often complex, costly, time-consuming and varying significantly across EU Member States in terms of documentation requirements and digitalization levels and on the other hand inclined to fraud, as highlighted by recent tax scandals, the objective of the FASTER Proposal is twofold:
- introduce more efficient and harmonized procedures across the EU for the relief of WHTs on income from publicly traded securities (dividends on equities and interest on bonds) in cross-border cases to enhance the development of the Capital Markets Union.
- address the risk of fraud / revenue losses for EU Member States.
Key measures of the FASTER Proposal
This FASTER Proposal shall notably implement the following measures. Two fast-track procedures complementing the existing standard refund procedure:
- relief-at-source procedure: under this procedure, the correct amount of taxes (reduced WHT rate/exemption) will be applied by the withholding agent at the time of the dividend/interest payment.
- quick refund procedure: under this procedure, the refund is ensured in case of over-withholding within 50 days from the date of payment (extended by the Council agreement – see below).
To benefit from the fast-track procedures under the FASTER Proposal, investors will need to engage with Certified Financial Intermediaries (“CFIs”), who are required to assist with these procedures. CFIs must be recorded in a national register (see below).
- Common EU digital tax residence certificates (“eTRC”)
Issuance of a digital tax residence certificate in a harmonised manner across the EU. This certificate will be required to benefit from the fast-track procedures.
- A national register and standardised reporting obligations for financial intermediaries
The national register will allow the CFI to apply for a WHT relief on behalf of their clients through the fast-track procedures. Standardised reporting will provide tax authorities with the essential information to check the eligibility for the WHT relief, to track the relevant payments and to avoid potential tax abuse or fraud in a harmonised way.
Agreement of the Council on 14 May 2024
- the Council agreed to insert new provisions regarding indirect investments. These provisions ensure that legitimate investors, such as certain collective investment undertakings or their investors, have access to the fast-track procedures.
- the Council agreed to add an exemption from the application of the relief systems for certain EU Member States that already have a comprehensive relief at source system and meet a national financial market capitalization representing less than 1.5% of the overall EU market capitalisation during each of four consecutive years. However, the Council maintains the principle that eTRC system applies to all EU Members States without exception.
- the Council extended the period for EU Member States to issue a digital residence certificate to 14 calendar days (from initially one working day) with validity limited to one calendar year maximum.
- the Council extended the period for EU Member States to complete the Quick Refund System: The excess WHT shall be refunded by the tax authority of the source State within the second month following the dividend or interest payment date (i.e., within 60 calendar days after the end of the request period). EU Member States shall apply interest on the amount of such refund for each day of delay after the 60th day.
- the Council added additional discretion on excluding high-risk cases from fast-track procedures, notably, allowing EU Member States to exclude certain high-risk cases from the fast-track procedures. Dividends exceeding EUR 100,000 per registered owner per payment date can be excluded, except for large regulated collective investment undertakings and certain pension funds. Exclusions can also apply to dividends on shares acquired within five days before the ex-dividend date, dividends associated with unsettled financial arrangements and certain cases involving non-certified intermediaries.
Conclusion
The European Parliament delivered its opinion on 28 February 2024. However, due to the changes made by the Council during negotiations, the European Parliament will be consulted again on the agreed text. Upon its adoption, it will be published in the EU’s Official Journal and enter into force. The current FASTER Proposal requires EU Member States to transpose the Directive into national legislation by 31 December 2028, with the national rules becoming applicable as from 1 January 2030.
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