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

What is the issue and why is it important to solve it? 

Withholding tax refund procedures on cross-border dividends and interest paid by EU companies have proven to be time-consuming and costly for investors, financial intermediaries, and tax authorities alike. This is mainly due to the difficulties in properly assessing entitlement to reduced withholding tax rates and the lack of digitised filing procedures. 

Studies show that close to 70% of retail investors who would be eligible for a reduced withholding tax rate do not claim it and 30% of retail investors have sold their EU portfolios because of this tax barrier. 

Many EU Member States have complex and non-standardised procedures for withholding tax refunds, often relying on paper-based processes with extensive documentation requirements (the EC has identified more than 450 different paper forms investors need to navigate to claim excess taxes!). Additionally, difficulties arise when the investor's country of residence cannot issue a certificate of tax residence meeting the precise requirements of the tax authorities in the investment country.

The costs associated with the recovery of excess withholding taxes, including tax advisory fees, translation and notarisation expenses, and costs related to legal representation, can be prohibitive for investors. These factors make the process burdensome and discouraging for many investors, deterring them from enforcing their rights to seek refunds of excess withholding taxes.

In some cases, the complex and extensive list of documents required for withholding tax refund applications can also pose challenges for financial institutions responsible for providing the documentation. The requirement to trace the complete payment chain means that each financial intermediary involved in the chain might need to provide documentary evidence regarding the payment, leading to potential inconsistencies in document reconciliation, which could result in rejections due to unreconciled differences.

Complex and unharmonised withholding tax procedures also pose a risk for the tax authorities as they create the potential for fraudsters to exploit the lack of transparency and inconsistencies in these systems to make fraudulent claims for tax refunds or to avoid paying the correct amount of taxes altogether. Previous loopholes in some Member States have enabled undue recovery of withholding taxes resulting in a loss of tax revenues amounting to €55 billion.

What is the proposal? 

The proposed FASTER directive has a dual purpose. Firstly, it seeks to simplify and improve the accessibility of withholding tax procedures, thereby promoting cross-border investments in the EU. Secondly, it aims to establish an information exchange mechanism that enables Member States’ tax authorities to effectively monitor and prevent tax abuse.

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.
• 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).
• 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 authorities 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.

What are the intended benefits, impacts and next steps?

The EC estimates a gain of €5.17 billion per year for investors, without considering the reduction of human and IT costs. If adopted, the directive should be transposed by the Member States by 31 December 2026 and would come into effect from 1 January 2027.

It is important to highlight that the current text is still in the proposal stage, and changes can be expected in the final version of the directive that will need to be transposed at the Member States level. Whilst a 2027 implementation date may appear distant, investors, financial intermediaries and tax authorities should currently be assessing tax operating and risk models to better understand risks and opportunities.

For financial institutions, clarifying the new responsibilities, identifying the gaps, defining the new operating models, and assessing the potential new revenue generation by offering access to fast-track procedures to their clients will be an important first step towards the implementation of FASTER. Financial institutions whose compliance with FASTER will be optional (i.e., financial institutions not qualifying as large financial institutions as well as non-EU financial institutions) will have to weigh the costs and the benefits of becoming CFIs.

We will be investigating this topic in greater detail on our PwC Blog so make sure you watch out for it!