FASTER: European Commission's Proposal to Streamline Withholding Tax Relief Procedures

On 19 June 2023, the European Commission (EC) issued proposed ambitious new rules to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and tax administrations. The initiative, commonly known as FASTER (Faster and Safer Tax Excess Relief) will enable financial intermediaries such as banks to apply simplified relief at source and refund procedures while also ensuring the fight against tax fraud through improved information exchanges with the relevant tax administrations.

Cross-border investments within the European Union face a challenge of double taxation as Member States impose withholding taxes on dividends and interest paid to foreign investors, who are also subject to income tax in their country of residence. To mitigate this issue, domestic tax provisions and double tax treaties may grant foreign investors reduced withholding tax rates or exemptions. However, the current refund and relief at source procedures are burdensome, costly (the EC estimated costs associated with inefficient tax reclaim procedures to over €5bn a year, with €730m related to paperwork alone), and time-consuming, leading to investor frustration and hindering cross-border investment. The lack of uniformity in withholding tax procedures across Member States adds to the complexity (the EC estimated that investors need to deal with over 450 different tax forms) and very often results in taxpayers foregoing their right to recover excess taxes.

As a preliminary remark, it is worth noting that the proposed directive provides streamlined tax relief procedures on publicly traded instruments only. Relief of excess withholding tax on dividends and interest from privately held assets is not covered in this proposal.

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, and which is certified to request relief based on fast-track procedures defined in the directive. It is currently proposed that all “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 are subject to several obligations associated with the CFI status:

• Registration: Financial institutions that are required to (or opt to) become CFIs will need to register with the competent authorities in the Member States in which securities’ issuers are located and where any of their clients have invested in. 

• 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) and will be limited to interest and dividend payments exceeding €1,000. CFIs included in one or more of the National Registers are subject to reporting to the authority maintaining the register. Information reporting to withholding tax agents is also required where relief at source has been applied. Information to be reported includes:

  • Details on the CFI itself (name, legal entity identifier, address, etc.),

  • Information regarding the recipient of the dividend or interest income (name, tax identification number, address, account number, etc.),

  • Information regarding the payer of the dividend or interest income,

  • Information regarding the dividend or interest payment (issuer, ISIN, security type, ex-dividend date, record date, settlement date, payment date, coupon date, amount and currency, and account number),and 

  • Information regarding the application of certain anti-abuse measures (holding period, information about any financial arrangements that might have been used to shift the economic ownership and/or investment risk of a security).

• 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. 

CFIs complying with the above requirements will be able to apply two specific fast-track procedures designed to expedite and harmonise the relief process throughout the EU. Member States will be able to choose which one to use – including a combination of both.

• Relief at source: Under the "relief at source" procedure, CFIs will be able to apply the reduced withholding tax rate or exemption upon income payment and the investors would not need to subsequently file tax reclaims. 

• Quick refund: Under the “quick refund” procedure, CFIs will be able to accelerate the refund process so as to ensure a refund of excess tax within 50 days from the date of dividend or interest payment.

Finally, the proposal establishes regulations regarding the issuance of digital tax residence certificates, also known as "eTRC". According to the proposal, tax administrations are expected to provide these certificates within one working day of the taxpayer's application, unless there are technical limitations preventing immediate issuance. The eTRC will allow investors to submit their withholding tax refund request digitally, making the reclaim process faster and smoother. Only one eTRC will be needed to claim several refunds during a calendar year, avoiding the issuance of multiple certificates of residence in case of an investor with a diversified portfolio in the EU.