Common EU-wide withholding tax procedures proposal

Update: On 10 December 2024, the EU Council announced that it had adopted the FASTER Directive. The text of the Directive can be found here.

Update: The EU Council has announced that it has reached political agreement on the proposed harmonised approach to EU withholding tax procedures. The proposed Directive contains measures introducing a common EU digital tax residence certificate (with an automated procedure for the issue of such certificates), accelerated procedures in addition to the current normal refund procedure for withholding taxes and standardised reporting obligations for financial intermediaries.

The proposed Directive will first need to go back to the European Parliament for consultation on the agreed text before formal adoption by the Council. Member States will then have until 31 December 2028 to transpose the Directive into national legislation, with the new rules having effect from 1 January 2030.

The European Commission has published for consultation a proposal for a directive which aims to introduce a common EU-wide system for withholding tax on certain dividend or interest payments. The proposals, set out in the Directive on Faster and Safer Relief of Excess Withholding Taxes, will include a system for issuing an EU-wide digital tax residence certificate, simpler withholding tax relief procedures as well as a system for tax authorities to exchange information and cooperate with each other.

The system will rely on taxpayers using the services of certified financial intermediaries registered with Member States to access these procedures, whether for relief at source or fast repayments of excess tax withheld. These financial intermediaries will be subject to reporting obligations under the proposed directive. The system will apply only to dividends from publicly traded shares and, optionally, interest from publicly traded bonds paid to registered owners who are resident for tax purposes outside that Member State.

The consultation is open until 18 August 2023 and comments should may be submitted via the Commission website. If agreed, it is proposed that the system will come into force with effect from 1 January 2027.

Background

The Commission’s Action Plan for fair and simple taxation supporting the recovery, published in 2020, included as one of its many tax-related proposals, the introduction of a common, standardised EU-wide system for withholding tax (WHT) relief at source coupled with a new exchange of information and cooperation mechanism between tax administrations, with the dual aims of both significantly lowering tax compliance costs for cross-border investors and also preventing tax evasion. In particular, the Commission considered that it was important, within the context of the single market, to address the burdensome withholding tax relief procedures for cross-border investors in the securities market and, in particular, for smaller cross-border portfolio investors.

The Commission notes that WHT procedures that allow non-resident investors to benefit from tax treaty or domestic benefits are often burdensome, costly, and lengthy as they vary considerably across Member States both in terms of documentation to be submitted by the taxpayers to obtain the relief from WHT and as regards their level of digitalisation. WHT procedures are also still prone to risk of tax fraud and abuse, leading to revenue losses for Member States, as shown by a series of tax scandals, notably the so called Cum/Cum and Cum/Ex cases. Indeed, due to these recent and very significant cases of sophisticated fraud, some Member States have introduced or are about to introduce even more stringent documentation requirements as part of their
procedures.

In 2022, the Commission carried out a public consultation on the possibility of introducing a common EU-wide withholding tax reclaim system. See our earlier article on that consultation here. The Commission put forward three possible proposals and the proposed Directive takes forward one of these proposals – for the implementation of a quick refund system within a set time frame and/or a relief at source system.

The draft Directive

The proposal is structured in two “building blocks”:

• the creation of an EU-wide digital tax residence certificate and
• less burdensome WHT relief procedures, including establishment of National Registers for specific financial intermediaries (Certified Financial Intermediary), standardised reporting obligation, and the obligation for Member States to set up a relief at source system or a quick refund system or a combination of both to ensure swift relief from WHT, based on DTT or domestic rules, for EU and non-EU investors.

EU-wide digital tax residence certificate (eTRC)

The Commission proposes that the eTRC should to be introduced by all Member States to provide a fast, easy and secure administrative process to confirm EU taxpayers’ tax residency. Article 4 would require common content for the eTRC, regardless of the issuing Member State, including identifying the requesting taxpayer and confirming that they are resident in the Member States according to its national rules. It is proposed that the eTRC covers at least the full calendar year in which it is requested (though it could be revoked where the conditions are no longer met). The minimum period of the eTRC would not prevent a Member States from issuing eTRC with a longer period, depending on the concept of tax residence and internal decision of each Member State. Member States will be required to recognise the eTRC issued by another Member States as adequate proof of residence of a taxpayer in that other Member State, to the extent that such eTRC continues to be considered valid by the issuing Member State.

Member States will be required to issue an eTRC within one day, as long as they have been provided with the necessary information and provided that no exceptional circumstances occur justifying a delay. To meet the requirement of one-day issuance, a fully automated system to issue the eTRC will need to be implemented by Member States, allowing for requests via an online portal.

Certified Financial Intermediaries

In order to benefit from the WHT relief procedures proposed by the Directive, investors will need to use financial intermediaries that are certified to provide those services. There will be two types of certification for Certified Financial Intermediaries (CFI):

• On a compulsory basis: for (1) large institutions (as defined in Regulation (EU) No. 575/201324) and (2) Central Securities Depositories in the scope of Regulation (EU) No. 909/201425 that are providing withholding tax agent services and that as such need to register with those Member States in which securities’ issuers are located and where any of their clients have invested in.
• On a voluntary basis: for all other entities (including those that are established in a third country jurisdiction) acting as financial intermediaries and meeting specific requirements by registering in one or several of the National Registers set up in accordance with this Directive; it is expected that registration should be with those Member States where their clients have investments in.

Member States that do not need to provide relief of excess withholding tax (for example, due to an exemption on WHT on dividend payments or where the relevant domestic tax rate is always lower than or equal to the rate that could be applied under DTTs) will not need to have a National Register in place.

Common reporting

In order to prevent tax fraud and abuse in relation to WHT relief procedures, the proposed Directive aims to introduce common reporting procedures. This will enable the source Member State to receive the information needed to check that the correct WHT rate applies and to assess if anti-abuse rules need to be applied. CFIs registered in any National Register will need to report where their clients’ investment takes place in a Member State that has a National Register (though this obligation may be outsourced).

The Directive sets out the reporting elements in Annex II. The information reported to the tax administration is designed to enable it to ascertain the identity of the final investor and his/her potential entitlement to the reduced WHT rate. Annex II provides for two reporting requirements that are aimed at helping to combat WHT abuse, mainly Cum/Cum abuse schemes, (i) information about the holding period of underlying securities and (ii) information about financial arrangements linked to the securities for which the taxpayer is requesting relief.

Reporting will be required via a standardised XML format scheme that will be set out in an implementing act to be adopted by the Commission. The time limit for reporting will be 25 days from the record date. In Member States where relief at source will apply and the dividend payment date is earlier than 25 days from record date, CFIs should have a mechanism in place to provide information to the WHT agent on the rate to be applied. Non-compliance with the reporting obligation will lead to penalties.

Systems of relief

The proposal provides for two systems of relief:

• a relief at source system and
• a quick refund system.

Each Member State will need to provide at least one the systems, but not necessarily both. Member States will have the discretion, for instance, to only allow low risk taxpayers to request relief at source whilst other taxpayers can only request a quick refund.

It should be noted that the scope of the proposed directive is limited to 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 Member State (Article 2).

The relief at source system (Article 12) provides for the correct amount of tax to be applied by the WHT agent at the time of the dividend/interest payment. The quick refund system (Article 13) provides that where tax is withheld at a higher rate, the excess tax is repaid within 25 days from the date of the request or from the date when the required reporting is fulfilled.

Articles 10 (request for relief at source or quick refund) and 11 (due diligence procedures) set out elements that are common to both systems. Article 10 requires the request to be made by the CFI maintaining the investment account of a registered owner receiving dividends or interest on behalf of such registered owner and also requires the CFI to verify that the registered owner (in essence) qualifies for the relief requested. Even so, Member States may refuse requests in certain cases, such as where the shares have been owned for less than two days or where the securities payment chain involves financial intermediaries that are not CFIs. As part of the process, the CFI is required to carry out due diligence on investors. In particular, the CFI requesting relief on behalf of a registered owner must obtain a declaration that the registered owner: (a) is the beneficial owner of the dividend or interest; and (b) has not engaged in a financial arrangement linked to the underlying publicly traded share that has not been settled, expired or otherwise terminated at the ex-dividend date. The CFI must also verify the eTRC or other tax residence certificate relied on and the registered owner’s entitlement to a specific reduced withholding tax rate in accordance with a double tax treaty or specific national legislation of the source Member State.

A major goal of the proposed directive is to prevent abusive/fraudulent tax practices and in particular Cum/Ex and Cum/Cum schemes. Member States’ tax administrations that wish to have more time to do some checks before agreeing to give relief have the possibility to not apply the relief at source or quick refund systems in specific circumstances, for example where the underlying securities have been acquired within two calendar days of the ex-dividend date and/or that the financial intermediary reports being aware of a financial arrangement involving the underlying securities that has not been settled, expired or otherwise terminated at the ex-dividend date.

Where the relief at source and quick refund systems set out in the proposed directive do not apply, Article 15 requires Member States to provide a standard refund procedure provided that the anti-abuse information is provided or the total dividend does not exceed EUR 1000.

Comment

The consultation is open for feedback until 18 August 2023 and comments can be posted on the Commission website. The consultation is important and all affected taxpayers and especially intermediaries should consider engaging with the process.

The proposal was strongly supported in the earlier consultation and the proposed directive includes elements which will certainly be welcomed by taxpayers. In particular, by providing for short deadlines for the processing of claims and by streamlining and bringing consistency to relief procedures. The proposal for a common digital eTRC should also a welcome development, though there is no proposal for bringing consistency either to the concept of residence in different Member States or to the concept of beneficial ownership of payments.

The proposal is also limited in scope to dividend payments on publicly traded shares and interest from publicly traded bonds. As such, investors in financial products that do not fall within these categories will still be left with the existing patchwork of double tax relief procedures.