FASTER: European Union proposition to simplify withholding tax reclaim procedures

At a glance

On 19 June 2023, the European Commission issued a new press release presenting their new Faster and Safer Relief of Excess Withholding Taxes (FASTER) proposal, a directive that harmonizes and simplifies the withholding tax reclaim procedure within the European Union. The FASTER proposal aims to prevent double taxation and tax abuse in the field of Withholding Taxes.

A closer look
 

Proposal background

The European Commission’s willingness to modernize withholding tax (WHT) reclaim procedures emanates from:

•  The complexity and non-harmonization of WHT reclaim procedures across EU Member States. Indeed, the procedures are often burdensome, costly and lengthy, leading to:
  • over 30% of retail investors opting to sell their EU portfolio; and
  • almost 70% of eligible retail investors failing to reclaim the reduced WHT rate they are entitled to.
• The risks associated with abuse and tax fraud that lead to revenue losses for EU Member States. The estimated cost of such losses amounted to approximately €150 billion between 2000 and 2020.
  
  

FASTER’s objectives

With the FASTER proposal, the Commission aims to:

• Ensure fair taxation within the EU Member States;
• Facilitate cross-border investments within the EU Member States; and
• Strengthen European legislation to prevent tax fraud and abuse, complementing the already existing and implemented Directive on Administrative Cooperation and Anti-Tax Avoidance.

Key points of the FASTER proposal

To implement a harmonized, modernized and simplified EU withholding tax reclaim procedure, the Commission includes three key propositions in the draft directive:

• Establishment of a common EU digital tax resident certificate: The goal is to have one single digital tax residence certificate valid for all procedures of WHT reclaim throughout all EU Members States. For example, investors with a diversified EU portfolio will need only one digital tax residence certificate to reclaim a variety of WHT refunds during the same calendar year. The efficiency of the request would also be an asset, as the digitalization of the tax residence certificate would enable investors to receive it the day after the submission of the request. Currently, most EU Members States still rely on paper-based procedures.
• Implementation of two fast-track WHT reclaim procedures to supplement the current standard refund procedure, through a:

1. Relief-at-source procedure: The applicable WHT rate will be determined based on the applicable Double Tax Treaty. Under this system, the correct amount of taxes will be applied by the withholding agent at the time of the dividend/interest payment.

2. Quick refund procedure: The WHT rate will be determined based on the specific rules applicable in the jurisdiction from which dividends/interests originate. A corrective refund should therefore be applicable within 50 days after the payment event (in case of over-withholding).

• Creation of a standardized reporting obligation that will enable domestic tax authorities to evaluate an applicant’s qualification for a lower WHT rate and identify potential tax abuse.

Please note: EU financial Institutions will be required to become Certified Financial Intermediaries (or CFIs). Non-EU institutions might be able to opt for this status. A great deal of the above simplification procedures, notably the fast-track refund procedure and subsequent reporting requirement, will rely on CFIs’ added duties to be compliant with.

Once adopted by Member States, FASTER should be transposed into national laws by 31 December 2026 and would enter into force from 1 January 2027. The expected cost savings are estimated at €5.17 billion per year for investors.

Note that the feedback period for the Proposal will last until 17 August 2023 directly on the Commission website.

What still needs clarification?

In light of the Commission’s proposal to implement a harmonized, modernized and simplified EU withholding tax reclaim procedure, we believe that the following elements require further clarification:

Applicability and validity of a common EU digital tax resident certificate: The proposal has not yet clarified if the EU digital tax resident certificate will apply to all types of beneficial owners. In addition, the validity and acceptance of these procedures by non-EU Member States are still subject to discussion. The proposal includes:

• Implementation of two fast-track WHT reclaim procedures which will supplement the current standard refund procedure: These new fast-track procedures would increase CFIs’ burden to collect client information. CFIs will need to implement dedicated procedures to ensure they receive accurate and reasonable information.
• Creation of a standardized reporting obligation: The anti-abuse system included in the FASTER directive aims prevent the use of cum-cum, cum-ex structure. In this regard, dividends acquired two days before the ex-dividend date would not benefit from WHT reclaim procedure. Other scenarios may be added to prevent further abuse.