On 19 June 2023, the European Commission published the Proposal for a Council Directive on Faster and Safer Relief of Excess Withholding Taxes (hereafter "FASTER" or "the Proposal"). With this new initiative, the Commission aims to tackle the current particularly burdensome withholding tax ("WHT") refund procedures - which differ between Member States - for cross-border investors in the EU and, at the same time, the risks of tax abuse related to refund procedures revealed notably by the Cum/Ex and Cum/Cum scandals.

This Proposal aims at creating:

  • Common EU digital tax residence certificates;
  • Standardised reporting obligations for financial intermediaries to provide national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse; and
  • Two fast-track procedures, assorted with new due diligence obligations, complementing the existing standard refund procedure to relieve any excess WHT that can be withheld by a Member State on dividend or interest income paid on shares or bonds traded publicly to non-resident investors.

Hereafter, we briefly describe the implications of the Proposal.

EU digital tax residence certificate

Member States will be required to issue an EU digital tax residence certificate within one working day from submission of a request. The certificate will notably be used by investors, as adequate proof of residence, to reclaim multiple WHT refunds and will replace the paper-based procedures currently applicable.

A common EU digital tax residence certificate ("eTRC") is to be introduced by all Member States in order to, mainly, streamline WHT procedures. It will identify the recipient of a payment subject to WHT (dividend or interest) and confirm its tax residency according to the relevant Member State's national rules1 .

Provided that no exceptional circumstances occur justifying a delay, Member States will be required to issue an eTRC within one working day from submission of a request. To meet this requirement, a fully automated system to issue the eTRC should be implemented by Member States which allows for requests via an online portal accessible to taxpayers and parties authorised thereby (e.g., financial intermediaries requesting the eTRC on behalf of their clients).

Member States shall recognise the eTRC as adequate proof of residence of the recipient of an income in another Member State.

Member States' National Registers

National registers of certified financial intermediaries which are large institutions that handle payments of dividends from publicly traded shares (and bonds) as well as central securities depositories that provide WHT agent services for the same payments will have to be established by Member States

Member States will have to establish a national register ("National Register") of Certified Financial Intermediary ("CFI"). A CFI is a financial intermediary which meets the requirements of relevant EU regulations and is supervised for compliance therewith.

All large institutions as defined in the Capital Requirements Regulation (i.e., credit institutions and investment firms) that perform custodial activities and, in this context, handle payments of dividends from publicly traded shares originating in their jurisdictions to registered owners who are resident for tax purposes outside that Member State, as well as central securities depositories that provide WHT agent services for the same payments, will have to register, as CFI, with their National Register. However, Member States can also opt to use the National Register in relation to payments of interest from publicly traded bonds. Financial intermediaries that are not under the obligation to register as CFI can still opt to be registered as such.

Financial intermediaries that do not comply with registration requirements may be subject to penalties. In addition, only Registered Owners engaged with financial intermediaries that are certified to provide those services will benefit from the systems of relief described in the Proposal.

Obligations of CFIs

The Proposal also aims at tracing payment flows until the final investors through the chain of financial intermediaries, and therefore defines certain reporting and due diligence obligations regarding registered owners. "Registered Owner" means any 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.

Standardised reporting obligation of CFIs

Through the standardised reporting obligation of CFIs, tax authorities will receive, within specific timelines, a relevant set of information allowing them to assess the eligibility of Registered Owners applying for a reduced WHT rate and to trace potential tax abuse situations.

CFIs will have to report to the competent authority, within specific timelines, a relevant set of information. For that purpose, the Proposal lays down a common set of reporting elements in Annex II, providing national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse. 

The reporting will take place via a standardised XML format scheme. The timeline to report the information comprised in Annex II is 25 days2 at the latest from the record date, which is the date at which the issuer of a security checks its records to identify securityholders eligible for a dividend or interest payout.

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Footnotes

1. The following information shall be included : (a) the first and last name of the taxpayer and the date and place of birth, if the taxpayer is an individual, or its name and its European Unique Identifier number (EUID), if the taxpayer is an entity (b) tax identification number; (c) address of the taxpayer; (d) date of issuance; (e) the covered period; (f) identification of the tax authority issuing the certificate; (g) any additional information that may be relevant where the certificate is issued to serve purposes other than relief of withholding tax under this Directive or information required to be included in a tax residence certificate under EU law.

2. "As soon as possible after the record date, unless a settlement instruction in respect of any part of a transaction is pending on the record date, in which case the reporting for that transaction shall take place as soon as possible after the settlement. If 20 days after the record date, settlement is still pending for any part of the transaction, certified financial intermediaries shall report within the next 5 calendar days indicating the part for which settlement is pending".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.