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EU feels “the need for speed” and agrees on “FASTER” withholding tax relief procedures

I’ve written about this proposed directive in these pages previously. Back then I referred to Lord Denning noting in a 1974 court decision that “when we come to matters with a European element, the Treaty is like an incoming tide. It flows into the estuaries and up the rivers. It cannot be held back”.  Pete “Maverick” Mitchell said “I feel the need, the need for speed” in the original “Top Gun” movie.  And now Denning and Maverick can be said to be of the one mind.  

Nearly two weeks ago the Council of the European Union agreed on the directive on the faster and safer relief of excess withholding taxes (FASTER). Once the necessary EU legislative procedures are completed then individual EU member states will have to bring the directive into their national law by 31 December 2028, with the national rules entering into force as from 1 January 2030.

FASTER aims to assist in the efficient functioning of the EU capital markets union by facilitating cross-border investment and ensuring fair taxation by preventing tax fraud and abuse in this area.

Right now, withholding tax relief procedures vary between member states. This can lead to administrative issues and costs for non-resident investors seeking tax relief. In addition, FASTER looks to address potential tax fraud and abuse. To get there, the directive seeks to bring about rules on the issue of digital Tax Residence Certificates (eTRC) by EU member states as well as looking to relieve excess withholding tax imposed by member states on dividends from publicly traded shares and, where applicable, interest from publicly traded bonds.

The eTRC is to be automated by member states to issue digital proof of tax residency to taxpayers resident in their jurisdiction for tax purposes. The intention is for the eTRC to be issued by the tax authorities of the relevant member state within 14 days from the request date. This may not be feasible in certain circumstances e.g., where a taxpayer’s tax residency requires additional authentication. In such instances, Revenue authorities must let the individual or entity requesting the eTRC know that more time is needed and explain why that is the case.

Certified financial intermediaries (CFIs) are financial intermediaries involved in securities’ payment chains and central securities depositories acting as withholding tax agents. These CFIs are required by FASTER to register on national registers of member states. In addition, the option to request registration would be open to other financial intermediaries, including outside the EU. Once confirmed, registered financial intermediaries would be “certified financial intermediaries” within a member state and become subject to the directive’s reporting and notification obligations.  

CFIs would be responsible for finding out the relevant withholding tax rate based on investor information and identifying any outstanding financial arrangements tied to the securities. CFIs must ensure alignment with data collected through standard business practices like “Know Your Customer” rules. Prompt communication of any changes in circumstances from investors is essential to ensure accurate reporting. Therefore, CFIs play a key role in the functioning of FASTER and the effective and efficient implementation of two fast-track withholding tax reclaim procedures.

FASTER allows member states to implement two fast-track withholding tax reclaim procedures for excess withholding tax complementing their existing standard refund procedure to make relief and refund processes faster and more harmonised across the EU.

Member states would have the option to use one or both of the following arrangements (1) A relief at source procedure where the relevant tax rate is applied at the time of payment of dividends or interest (in that way overpaid withholding should not occur in the first instance); or (2) a quick refund system where the reimbursement of overpaid withholding tax is granted within a set deadline. Under that system, overpaid withholding tax may be requested by the CFI maintaining a registered owner’s investment account within the second month following the month of payment of the dividend or interest. If the member state does not process the refund within 60 calendar days starting from the second month following the month of the payment, it may be liable to interest for each day of delay after the 60th day. So, it is in its interest to make sure the refund happens fast.

The Council agreed that member states must introduce one of the above mentioned fast-track procedures, or a combination of both, if they provide relief from excess withholding tax on dividends paid on publicly traded investments.  

The directive includes provisions regarding indirect investments where the investor invests through a Collective Investment Undertaking (CIU), ensuring that legitimate investors such as certain CIUs or their investors have access to the fast-track procedures. CFIs requesting relief on behalf of a registered owner would need to carry out certain due diligence regarding the registered owner’s eligibility to benefit from tax relief and report the relevant information to competent authorities.  Member states would have the option of maintaining their current procedures, and not apply FASTER provided they meet a number of Ts and Cs, for example where they provide a comprehensive relief at source system that meets specific criteria as well as meeting a certain market capitalisation ratio threshold. In addition, the Council also brought about certain instances where member states can exclude requests for withholding tax relief to perform further checks on the transaction.

So what happens next? FASTER is subject to a special legislative procedure for tax measures, under which the Council acts as the sole legislator, and may agree proposals from the Commission provided there is unanimous agreement. The European Parliament delivered its consultative opinion at the end of February but needs to be consulted again on the agreed text. Following that EU finance ministers are expected to formally adopt the proposal early in 2025. Member states will then have to bring about the directive into national legislation by 31 December 2028, but the national rules will enter into force as from 1 January 2030. This is to allow some time to adapt to the new FASTER approach.  

Please note this article first featured in the Business Post on Sunday 26 May and was re-published kindly with their permission on our website.