The EU FASTER Directive is coming - but what are the implications for Swiss banks?

Swiss withholding tax refund process

Swiss withholding tax applies at the rate of 35% on dividends paid by corporations resident in Switzerland as well as interest on bonds issued by Swiss resident debtors or paid by Swiss banks on their client accounts. At 35%, the rate of the Swiss withholding tax is among the highest in the world. In addition, excess withholding tax can only be claimed through a refund process (besides very limited exceptions). In particular for investors resident outside Switzerland the process is burdensome, paper-based (with the exception of Germany) and time-consuming. As a rule, refund claims can only be filed in the calendar year following the year in which the dividend or interest subject to Swiss withholding tax was paid – therefore coming with an important cost in terms of delayed cash flows.

Improvements introduced by FASTER

As the name already indicates, the purpose of the directive is to speed up the process by which cross-border investors, who are holding publicly-traded securities of EU-based issuers, can obtain withholding tax relief. To achieve this goal, the directive introduces several new mechanisms:

• Electronic tax residency certificate (’eTRC’): investors resident for tax purposes in an EU Member State will be able to get a tax residency certificate within 14 days in an electronic format. The eTRC will then be forwarded by the investor to their bank, which will then determine to what relief the investor is entitled to, based on the eTRC.
• Fast-track procedures: EU Member States will have to introduce at least one (or both) of two mandatory procedures:
  
  
  1. A ’relief-at-source’ procedure where the reduced tax rate is applied at the time of payment of the dividend or interest. This is the most favourable procedure for investors, because the withholding tax is reduced upfront and no refund has to be claimed.
  2. A ’quick refund’ procedure where the reimbursement of overpaid withholding tax is granted within a set deadline. Tax authorities will have 60 days, after the bank files the required claim, to make the refund and, if they miss the deadline, pay interest to investors.
      

• Standardised reporting: to prevent fraud, the directive introduces standardised reporting (in XML format). Financial intermediaries will have to provide details about the investors claiming relief or refunds for each payment, before the end of the second month following the month of the payment date. This requirement to have quasi-real time reporting, for every dividend and interest payment in scope, will put a massive workload and responsibility on the participating financial institutions.

Will FASTER foster changes in the Swiss refund procedure?

Swiss tax authorities are perfectly conscious that the existing paper-based, refund process is no longer adequate and have been working to move the procedure online. Nonetheless, as of today, only German residents have access to an online refund process for Swiss withholding tax. While the target remains to extend this facility to other countries, progress is slow as electronic transmission channels need to be agreed and established for each bilateral relationship. However, even if the online refund process is extended to more countries, we will still be far away from the FASTER standard. For example, under Swiss legislation, foreign investors can file a refund request only after the end of the calendar year – thus far from the maximum two months given to EU Member states under the directive.

Maybe an area where progress in Switzerland could be faster is the issuance of an eTRC. Currently, many Cantons enable investors to request a TRC online, but the document still comes in the mail. The fact that the EU now adopts a common standard could certainly persuade Cantons to introduce a similar facility. This would also help Swiss banks participating in FASTER to process refunds for their Swiss resident clients in a more efficient manner.

Conclusion

FASTER introduces innovative processes to accelerate the refund of withholding taxes to foreign investors, by imposing strict constraints on EU tax authorities such as the obligation to issue an eTRC within 14 days and process refunds within two months after receiving the request, or otherwise pay late interest.
After FASTER goes live, the Swiss withholding tax refund process will be even less attractive than it is today. To dissuade foreign investors from avoiding the Swiss market for this reason, Swiss tax authorities (and lawmakers) need to improve the process. Maybe some of the technical standards that will be established by the EU to implement FASTER could be adopted in Switzerland.

And what about MiKaDiv?

MiKaDiv (Mitteilungsverfahren Kapitalertragsteuer auf Dividenden aus Aktien und Hinterlegungsscheine) is the German precursor of FASTER and will come into force as of 1 January 2027. MiKaDiv introduces detailed disclosure and reporting obligations on German dividends. It aims to make withholding tax processes more digital and thus more transparent, and reduce susceptibility to abuse, as evidenced in recent years particularly in the context of cum-ex and cum-cum structures.

The regime defines data and technical requirements that non-German custodians must implement to remain operationally connected to German relief at source and reclaim processes. If you want to learn about the implications of the new rules, recent regulatory developments and best practices for implementation, please join our MiKaDiv breakfast events in Zurich (9 June) or Geneva (23 June) where we will discuss:

• MiKaDiv’s relevance for non-German custodians when serving German and non-German resident clients
• Information that must be disclosed in the custody chain
• Consequences of incorrect or incomplete information disclosure for non-German intermediaries and their clients
•  Implementation actions
• Outlook on EU FASTER

By attending, you will ensure that you are equipped with the knowledge to navigate these new requirements and understand their impact on your organisation and clients.

👉 Sign up here: Registration

Authors

• Bernhard Schopper, Partner, Swiss Tax & Legal
• Petrit Ismajli, Partner, Financial Services Tax