EU to speed up withholding tax procedures
by Sara White, Editor, Business & Accountancy Daily
The European Council has adopted a new tax directive for faster and more transparent procedures to obtain double taxation relief
The Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER) is designed 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. It also expected to encourage cross-border investment and help fight tax fraud.
Mihály Varga, Hungarian minister for finance, said: ‘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.’
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.
Common tax residence certificate
The directive will introduce a common EU digital tax residence certificate (eTRC) that taxpaying investors will be able to use to benefit from the fast-track procedures to obtain relief from withholding taxes.
Fast-track procedures
The directive will allow member states to have two fast-track procedures aside from 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; or
• a ‘quick refund’ system where the reimbursement of overpaid withholding tax is granted within a set deadline.
EU countries will have to apply the fast-track procedures if they provide relief from excess withholding tax on dividends paid for publicly traded shares.
There are also additional circumstances where 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.
There will also be fast-track procedures for investors who use collective investment undertakings.
Under the new rules, certified financial intermediaries requesting relief on behalf of a registered owner will have to carry out due diligence about the registered owner’s eligibility to benefit from tax relief.
The directive will set a standardised reporting obligation for financial intermediaries (like banks or investment platforms). This will make it easier for national tax authorities to detect potential tax fraud or abuse.
Member states will have to establish national registers where large (and optionally smaller) financial intermediaries will have to register to be certified across the EU. This will be facilitated through a new European Certified Financial Intermediary Portal which will act as a central dedicated website where the national registers will be accessible.
Once registered financial intermediaries will need to report the necessary information to the relevant tax authorities so that transactions can be traced.
Member states will have the option of requesting more extensive reporting in relation to transactions with a view to detecting possible cases of tax abuse or fraud.
There will be a penalty system for non-compliance controlled by individual member states.
The FASTER Directive has now been adopted and will be published in the EU’s Official Journal in due course.
Member states will have to transpose the directive into national legislation by 31 December 2028, and the national rules will have to apply from 1 January 2030.
Council Directive on Faster and Safer Relief of Excess Withholding Taxes
