Cross-border withholding taxes: the EU approves the FASTER Directive

In June 2023, the European Commission presented a proposal relating to the FASTER system, with the aim of making withholding tax procedures in the EU more efficient and secure, both for cross-border investors and for the tax administrations of the Member States, to the benefit of the EU Capital Markets Union. Last February 28th, the EU Parliament adopted the Directive proposed by the Commission with amendments.

The Directive in question, in order to pursue the objective of simplifying the procedures for refunding excess withholding taxes in a cross-border context, aims to:

• pursue a significant reduction in the times for granting exemption or reimbursement of excess withholding tax;
• compliance by financial intermediaries with customer verification and reporting obligations with tax administrations;
• the prevention of tax abuse practices related to withholding tax.

The main tools necessary to implement the aforementioned objectives are three:

1. the release of the digital certificate of tax residence;
2. the national register of financial intermediaries;
3. accelerated procedures.

Digital certificate of residence

In order to strengthen the capacity of Member States to prevent and counteract potential fraud or abuse, currently favored by fragmentation and the general lack of reliable and timely information on investors, the Directive provides for the establishment of a common regulatory framework for exemption from excess withholding taxes on cross-border investments in securities.

This regulatory framework should guarantee transparency and certainty on the identity of investors for issuers of securities, agents responsible for collecting withholding tax, financial intermediaries and Member States. To this end, the measures that will be introduced will have to be based on automated procedures. Therefore, the digitalization of the tax residence certificate (in terms of procedure and form) is proposed, which becomes a pre-requisite for investors access to any exemption or refund procedure.

To ensure that all EU taxpayers have access to common, adequate and effective proof of their residence for tax purposes, Member States should issue the eTRC (common digital residency certificate for taxpayers) digital tax residence certificate within one working day from the presentation of the relevant request by a person deemed to be resident there for tax purposes. For greater efficiency, the certificate should be valid for at least the whole year and Member States have the right to revoke it if the tax administration has proof to the contrary of tax residence for that year. In order to enable efficient identification of EU companies, the certificate should also include information on the European Unique Identifier (EUID).

National register of financial intermediaries

Another key instrument of the FASTER Directive is the national register of financial intermediaries, involved in the payments of dividends and interest from traded securities to investors resident in another Member State. Registration should be requested by the financial intermediary itself, by submitting an application to the competent authority designated by the Member State and including evidence that the financial intermediary meets certain requirements. Member States shall ensure registration within two months of the submission of the request by the financial intermediary.

The same States that maintain a national register, should also take measures to remove from this register any certified financial intermediary who requests it or who no longer meets the relevant requirements. These Member States, may also decide to provide for the removal of certified financial intermediaries from the national register or to deny them access to the exemption system, if it appears that they have repeatedly breached their obligations.

Registration in the register, necessary for certified financial intermediaries to request exemption from withholding tax on behalf of their clients, will determine a series of information obligations. In particular, information relating to dividend and interest payment transactions exceeding 1.500 EUR must be transmitted to the tax administration of the country of origin which, in this way, will be able to have global knowledge of the payment chain between the issuer and the beneficiary. final actual amount and the (potential) right to exemption from withholding tax.

Accelerated procedures

The implementation of the objectives of the FASTER Directive will also materialize with the implementation of accelerated procedures for exemption from excess withholding taxes, to make the Capital Markets Union more effective and competitive. Taking into account the different approaches adopted by Member States, two types of procedures are foreseen:

• exemption at source, by direct application of the appropriate tax rate at the time of withholding and
• rapid repayment within a maximum period of 50 days starting from the date of payment of the dividend or, if applicable, from the date on which the issuer of the bond must pay interest to the holder of the bond (ex-dividend date).

Member States should be free to introduce one of the two procedures or a combination of both, while ensuring that at least one is available to all investors, if the requirements of the directive in question are met.

However, where the requirements of the Directive are not met or the investor concerned so wishes, Member States should apply existing normal refund procedures for exemption from excess withholding taxes.

Furthermore, registered owners (in particular retail investors and their authorized representatives) will be able to maintain the right to recover excess withholding tax paid in a Member State if they provide evidence of compliance with the conditions established by national law. Member States have, however, the right to reject a refund request when a tax verification or audit procedure is initiated, on the basis of risk assessment and in accordance with national law.

Finally, we would like to remind you that the adoption and publication by Member States of the legislative, regulatory and administrative provisions necessary to comply with the FASTER Directive should take place by December 31th 2026 and their application should start from January 1^st, 2027.