European Parliament approves directive for Faster and Safer Relief of Excess Withholding Taxes (2023/0187)

The revised text endorsed by the European Parliament incorporates several amendments to enhance withholding tax procedures and fight against tax evasion effectively.

Electronic tax residency certificates (eTRCs)

An amendment mandates Member States to issue eTRCs within three working days, a revision from the previous one-day deadline. This extended period aims to allow for more robust verification processes while ensuring timely issuance of necessary documentation.

Individuals or entities deemed residents for tax purposes must promptly inform tax authorities of any changes affecting the eTRC's validity or content.

Additionally, the Directive emphasises the importance of aligning tax consequences for entities determined as shell entities, as provided for in the Commission proposal for the so-called Unshell Directive. While not expressly stated, the European Parliament suggests that such ramifications could entail the ineligibility of shell entities to acquire eTRCs.

Certified financial intermediaries (CFIs)

The European Parliament proposal maintains the concept of CFIs while introducing significant changes to their reporting obligations.

Under the revised text, the European Parliament suggests that CFIs should be subject to an increased threshold for exemption from reporting, i.e., CFIs would be exempt from reporting if dividends paid do not exceed EUR 1500, up from EUR 1000 in the initial proposal. Furthermore, reporting obligations require CFIs to submit the required data within a maximum of 20 calendar days after the recorded date and retain the data for six years thereafter.

Also, the registration process for financial intermediaries of third countries should be streamlined, minimising administrative burden without delineating the differences with financial intermediaries within the EU.

As a significant departure and improvement from the initial text, the European Parliament’s text offers the possibility to verify investors' eligibility to reduced withholding tax rates on an annual basis (rather than on a per-payment basis as foreseen in the initial text), therefore significantly reducing administrative burden associated with FASTER.

Exemption procedures

As initially proposed, the directive outlines two types of procedures: (i) relief at source, which involves the direct application of the appropriate tax rate at the time of withholding, and (ii) quick refund, whereby refunds are processed within a maximum of 50 days from the date of income payment. Member States have the flexibility to adopt either or both procedures based on their specific circumstances.

Exemption procedures are subject to certain exceptions outlined in the previous version of the directive. For instance, exemptions will not apply in cases where income is linked to a financial arrangement that has not been settled, expired, or otherwise terminated at the ex-dividend date. A specific provision now extends the period before the ex-dividend date from two to five days, during which no exemption should be granted if dividends are paid on publicly traded shares acquired by the registered owner.

In instances where the conditions for implementing relief at source or quick refund are not met (e.g., due to incorrect documentation provided by the investor), the option to introduce a standard refund process, if available, is retained. However, Member States are empowered to reject refund requests during verification procedures or tax audits initiated based on risk assessment criteria. This provision is designed to prevent fraudulent activities and maintain the integrity of the tax relief process.

Furthermore, the directive emphasises the importance of data protection by limiting the retention of personal data to five years (previously ten years).