10 December 2024

Taxation: Council adopts new rules for withholding tax procedures (FASTER)

The FASTER directive 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.

The FASTER directive will align our withholding tax relief procedures to make sure investors don’t pay double taxes on the returns from their cross-border investments in shares and bonds. This is an important step towards deepening the capital markets union, as more efficient withholding tax procedures will encourage investment on the EU’s financial markets. They will also reduce administrative burden and make it easier to spot tax fraud.

Mihály Varga, Hungarian minister for finance

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 states 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 FASTER directive 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 will allow 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

EU countries 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 capitalisation 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. These features take into account the size of the financial markets of member states, while also recognising that some member states maintain national systems that are adequate for their current market conditions.
• they provide relief from excess withholding tax on interest paid for publicly traded bonds.

The Council 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, in order to perform further checks, with a view to preventing fraud.

The Council added provisions to the text regarding indirect investments for cases where the investor does not invest directly insecurities but through a collective investment undertaking.

These provisions ensure that legitimate investors such ascertain 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...

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