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

Current tax reclaim process

Banks offering a tax reclaim service will typically complete the withholding tax refund forms for their clients that have subscribed to the service. In this process, all the credit advices showing withholding tax levied on the dividends and interest paid to the client are extracted and attached. The tax refund forms, together with all supporting documents, are then be mailed for validation to the tax authorities of the client’s jurisdiction of tax residency, before going to the country of source of the income to proceed with the refund. In most countries, the process is still entirely paper-based, and the bank has to prepare as many request packs as they have clients, multiplied by the number of source countries where withholding tax is applied.

How FASTER changes the game

FASTER aims to automate and speed up the withholding tax relief process by introducing a ’relief at source’ and a ’quick refund’ procedure relying on electronic filings. As part of the process, EU resident investors will be able to obtain an electronic tax residency certificate within a maximum of 14 days. It is important to note, however, that the process is limited to withholding taxes levied on dividends and interest by EU Member countries (see table for withholding rates applied by major markets) and the tax residency e-certificate is introduced only for EU resident investors. For non-EU resident investors, including Swiss residents, other formats of tax residency certificate can be accepted, but it is likely that these will also be on paper. Swiss banks that have an important Swiss and non-EU client base will therefore not escape the need to handle multiple formats of residency certificates.

Whether collecting electronic or paper certificates of tax residency, banks will have to perform due diligence checks before any relief is granted, namely: (a) obtain a declaration from the investor that they are entitled to double tax treaty benefits (including the legal basis and the applicable withholding tax rate); (b) if required by the source Member State, confirm that the investor is the beneficial owner of the dividend or interest in accordance with the national rules of the source Member State or the applicable double tax treaty; and (c) ensure that the security holding is not part of a financial arrangement that has not been settled, expired or otherwise terminated before the ex-dividend date. These requirements have been criticised because they prevent the possibility of fully automating the process and rely on concepts that are not clearly outlined. Participating banks will however have to define processes that allow them to comply with those requirements.

Go with FASTER or stick with traditional tax reclaim?

For banks, the answer to this question will very much depend on the nature of their clients:

• Institutional investors, such as corporations, pension funds and collective investment vehicles will benefit from the FASTER procedures, because for these investors the amounts of withholding tax to recover are material. The possibility for a fast refund – or even better, a relief at source –is a key advantage as the cash from the tax relief can be re-invested immediately. For tax-exempt investors, such as pension funds or collective investment funds, it has to be checked whether they have access to the treaty network of their country of registration. For example, Swiss-based investment funds have access to only a very small number of double tax treaties with EU countries. FASTER does not create any new benefits in terms of reduced withholding tax rates; the basis remains the existing tax treaty network, and entities that do not qualify for treaty benefits under those cannot be given access to the FASTER mechanisms.
• For retail clients, either private individuals or small businesses, the amounts to recover are usually small. While such clients would be eager to benefit from a quicker refund procedure, the question is rather for the bank to decide whether the gain is worth the investments required by FASTER when compared to existing reclaim services.

For banks that decide to join FASTER, an additional question will be whether to keep their existing tax reclaim services, among other reasons to recover withholding taxes in markets outside the EU. While for certain banks the answer will clearly be positive, other banks may lack the minimum volume to justify keeping such service, and outsourcing the tax reclaim service could be an alternative option.

A final point is that the directive does not prohibit banks from charging their clients for the relief process under FASTER. Therefore, banks currently charging for their reclaim services could continue to do so.

What next?

Given that the participation in FASTER is optional for Swiss banks, they will have to assess whether the costs of joining the directive’s new relief mechanisms are justified by the benefits that their clients will get and – incidentally – how much they can charge for this service. If joining, banks will also have to re-assess the remaining value of their existing tax reclaim services and decide whether to retain them, end them or maybe look for an outsourcing solution. Whatever the bank’s situation, a careful cost-benefit analysis of these different scenarios will be required.

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