FASTER: Commission’s proposal for Faster and Safer Withholding Tax Procedures

In brief

As you are no doubt aware, the European Commission published the draft Faster and Safer Relief of Excess Withholding Taxes (FASTER) Directive on 19 June 2023 (click here for the draft Directive). It has the laudable aim of making withholding tax (WHT) procedures in the European Union more efficient and secure for investors, financial intermediaries, and Member State tax administrations. So, is this aim achievable and does the draft Directive enable this?

The simplest and probably the most welcomed development is the proposal for a common electronic tax residence certificate. According to the proposal, tax authorities are expected to provide these certificates within one working day of the taxpayer's application, unless there are technical limitations preventing immediate issuance. This eTRC should also cover the minimum period of one calendar year, although it is highlighted that longer periods are permitted. 

Although some tax authorities have already moved towards electronic and digitally “signed” certificates, a transition that was expedited by the Coronavirus pandemic, many still require printed, signed, stamped, and even notarised certificates of residence from the investor.

This would be a notable departure for some Member States who currently only provide confirmation of entitlement retrospectively due to concerns over prospective confirmation of eligibility. This is dealt with in the draft by stating that: “if the circumstances at the end of the year do not support the content of the eTRC issued during the year, such eTRC can be deemed not valid by the issuing Member State and any other Member State concerned”.

This neatly solves the problem of prospective eligibility but would then create a complicated withholding tax reversal for the ultimate beneficiary and the custody value chain.

Member States would be able to choose to use either one or a combination of both; (a) relief at source system; and (b) a quick refund system.

Under the ‘relief at source’ system, the correct amount of tax is applied by the WHT agent at the time of payment of dividends or interest based on the applicable domestic rules and/or international agreement.

Under the ‘quick refund’ system, the tax is withheld at the higher rate applied in the source country, but the excess tax is then given back within a set time frame of maximum 25 days from the date of the request or from the date when the required reporting is fulfilled, whichever is the latest. This should take place within 50 calendar days from payment date.

It is important to note that in both cases, the relevant actors in the procedures would be Certified Financial Intermediaries (“CFIs”) acting on behalf of their investors. This neatly brings us onto the associated reporting obligations.

The proposed directive introduces the notion of a certified financial intermediary (CFI) which is generally a financial intermediary that handles payments of dividends and interest on publicly traded securities issued by EU issuers, and which is certified to request relief based on fast-track procedures defined in the directive. 

It is currently proposed that all EU-based “large financial institutions” (broadly defined as systemically important institutions for prudential supervision purposes and institutions with total assets of more than €30bn) and central securities depositories will be required to become CFIs. 

Becoming a CFI will be optional for financial intermediaries that do not qualify as large financial institutions. It is interesting to note that non-EU financial institutions will also be able to become CFIs provided that they are not resident in a non-cooperative jurisdiction for tax purposes. 

Financial institutions with the CFI status will be subject to several obligations associated:

• Registration: Financial institutions that are required to (or opt to) become CFIs will need to register in the national register of certified financial intermediaries with the competent authorities in the Member States in which securities’ issuers are located and where any of their clients have invested in. 
• Eligibility assessments: CFIs will need to have adequate procedures in place to assess investors’ eligibility to reduced withholding tax rates or exemptions. To this effect, CFIs will need to obtain and review a declaration of beneficial ownership, a tax residence certificate, and a declaration of tax residence for each investor applying for relief. CFIs will also be required to verify this information against their own records. 
• Reporting: CFIs will be subject to reporting requirements, within specific timelines, whereby they will need to report details on dividends and interest payments for which relief has been sought. Reporting will be done electronically (in XML). 

Cross-border investments usually involve a payment chain of financial intermediaries, and the directive requires that relevant procedures should allow for the tracing and identification of the chain of intermediaries and hence of the income flow from the issuer of the security until the final recipient, i.e., the sole investor or registered owner.

These registers would help national tax administrations verify and validate eligibility for the reduced rate and detect potential abuse. Common rules would be introduced to define when financial intermediaries would be held liable for providing incorrect data that could lead to lost tax revenue for the Member State. The liability would be placed at the level of the financial intermediary closest to the investor, who is responsible for performing the due diligence requirements. The intermediary would be liable in case of mis- or under-reporting, subject to certain exceptions.

On 19 September 2023, the EU Parliament had a public hearing about FASTER. As anticipated, establishing a clear definition for the beneficial owner proves to be an intricate matter. Importantly, the absence of such a definition will persistently complicate efforts to prevent double taxation. Moreover, it will significantly complicate the responsibilities that FASTER seeks to assign to CFIs, particularly their role in fulfilling due diligence requirements, which encompass identifying the beneficial owner.

Despite the thorough consideration of implementation and ongoing expenses by the European Commission during the directive's formulation, it is anticipated that the Directive's implementation costs are substantially underestimated. They are expected to exceed the current estimates of €75.9 million (one-time) and €13 million (ongoing costs) by a considerable margin. Furthermore, given the slim profit margins within which custody and tax documentation services operate, these increased costs are likely to be indirectly transferred to investors (the cost for small investors was also discussed during the hearing).