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

Over the years, the European Commission and various international organisations. have taken steps to address inefficiencies and mitigate risks of fraud or abuse in withholding tax (WHT) procedures. These efforts include:

• 2009: The European Commission issued a recommendation to Member States aimed at simplifying WHT procedures.

• 2013: The OECD introduced the Treaty Relief and Compliance Enhancement (TRACE) implementation package to tackle inefficiencies in WHT processes.

• 2017: The European Commission established a code of conduct on withholding tax, which encouraged a voluntary commitment by Member States to adhere to best practices.

In March 2023, a survey found that nearly 70% of eligible retail investors do not claim reduced withholding tax rates.

The FASTER directive aims to reduce administrative tasks and improve efficiency and transparency in cross-border investments by introducing a digital tax residence certificate, optional relief-at-source and quick refund systems, and reporting requirements for Certified Financial Intermediaries (CFI). The European Commission prioritises both speed and security.

The directive does not change eligibility for reduced withholding tax rates but modifies the process for obtaining them. This directive primarily targets listed equities, but Member States may choose to extend their systems to include withholding tax on interest from bonds listed on public markets.

The directive includes three primary components to streamline and secure withholding tax (WHT) processes:

• Digital Tax Residence Certificate: The directive mandates an EU-wide electronic tax residence certificate (eTRC) to be issued by Member States within 14 calendar days of a request, replacing slower, paper-based systems. The eTRC must include specific information such as the taxpayer's name, tax identification number, address, and the covered period 

• A new status for the banks with reporting obligations: The directive provides a new status, as Certified Financial Intermediaries (CFIs) which will be mandatory for the European systemic banks, and on voluntary basis for others and open outside the European Union. The Banks must register as CFIs via a centralised platform to be compliant in each investment market. CFIs will be responsible to perform strong due diligence on the investors and report, directly or indirectly, to the national tax authorities of the investment market the information regarding the incomes (e.g. details about the payment recipient, the payer, the specific dividend or interest payment, and anti-abuse information)  in order to facilitate tax collecting and reconciliation.

• Relief-at-source and quick refund options: Member States will have the flexibility to adopt either a “relief at source” system, which applies WHT exemptions at the time of payment, or a “quick refund” procedure, providing refunds within 60 days. The new withholding regime will place CFIs personally responsible for proper tax withholding. If an investor is found to have received inappropriate withholding tax relief, the CFI could lose its certification and penalties can be imposed.

The European Parliament validated the previous directive in February 2024, and it was voted on by the Council of the European Union in May 2024. Due to significant changes made by the Council, a new consultation with the European Parliament was requested and took place on 14 November. The updated Directive was approved with 555 out of 645 votes.