Unveiling the EU Commission’s proposal for streamlining WHT relief procedures

The European Commission's innovative “Proposal for a Council Directive on Faster and Safer Relief of Excess Withholding Taxes” (the “FASTER” proposal) published on 19 June 2023, seeks to refine and optimise withholding tax (WHT) procedures in the EU by setting a common EU framework for the relief of excess WHT on cross-border investments in securities. 

The remit of the directive would be specifically restricted to financial instruments that are traded on a regulated market or a multilateral trading facility. No relief from excess WHT on dividends and interest arising from unlisted assets is currently proposed.

At the heart of the FASTER proposal are two original concepts, namely:

• A common EU digital tax residence certificate (eTRC) with content standardised across all member states. National tax authorities would have to grant these certificates within one working day from application, subject to any valid technical issues. The eTRC would be issued by the member state of residence, to identify the taxpayer and confirm that the taxpayer is resident in the member state according to its national rules. An eTRC would provide investors with a digital conduit for lodging their WHT refund claims, making the reclaim process more efficient.

Notably, a single eTRC would be sufficient to claim multiple WHT reliefs across various EU jurisdictions during the same calendar year, avoiding the need to issue several residence certificates for investors with broad EU portfolios; and

• The certified financial intermediary (CFI) concept. A CFI would essentially be a financial entity that had attained certification to expedite WHT relief procedures. Large financial institutions as well as central securities depositories that provide WHT agent services, would be required to acquire CFI status. For other financial intermediaries, acquiring CFI status would be discretionary. Notably, financial institutions domiciled outside the EU would also be eligible for CFI status provided they were not resident in a jurisdiction deemed as non-cooperative for tax purposes.

CFIs would be obliged to electronically compile and submit relevant details concerning the dividends and interest payments on which the WHT relief is to be requested, provided the total amount of the payments exceeds a de minimis threshold of EUR 1,000. The scope of reportable information would include relevant details about the CFI, the recipient and the payer of the income, and the payment; as well as information regarding the potential application of anti-abuse measures (e.g., whether the securities were acquired within two days of the record date; the first in, first out (FIFO) method being used in case of regular trading positions). 

Within this framework, CFIs would be authorised to establish comprehensive procedures to evaluate investors' eligibility for reduced WHT rates or exemptions. In addition to the verification of the eTRC mentioned above, this would require a declaration from the investor confirming that it is the beneficial owner of the dividend or interest, as defined under the national legislation of the source EU member state. 

Given this requirement, and in parallel with the traditional WHT reclaim procedure, CFIs would be allowed to request, on behalf of their registered investors:

• Relief at source from the relevant WHT agents: This would enable the application of the appropriate WHT rate or exemption directly at source, thereby removing the requirement for investors to lodge subsequent WHT reclaims in the member state; and/or
• Quicker refunds from the source member state: This mechanism empowers CFIs to accelerate the refund process, ensuring repayment of excess WHT within a 25-day window from the dividend or interest payment date.

The European Commission’s proposal promises a more streamlined and efficient mechanism for managing WHT tax reclaims across the EU. The anticipated outcome of this endeavour is the cultivation of a more favourable investment climate within the EU, consistent with the general goals of both the EU Capital Markets Union and the OECD Treaty Relief and Compliance Enhancement (TRACE) initiative.