Withholding tax: EU Council agrees new rules

On May 14^th 2024 the Council of the European Union (“Council”) reached an agreement (general approach) on safer and faster procedures to obtain double taxation relief, which will help boost cross-border investment and help fight tax abuse.

The so-called FASTER initiative (“Faster”) aims to make withholding tax procedures in the EU safer and more efficient for cross-border investors, national tax authorities and financial intermediaries, such as banks or investment platforms.

The Council reached a general approach on a draft of a directive on faster and safer relief of excess withholding taxes (“Directive”) based on the following points:

• ensuring fair taxation in the internal market and the good functioning of the Capital Markets Union are among the key political priorities for the European Union (“EU”). In this context, removing obstacles to cross-border investment, while combating tax fraud and abuse is critical. Such obstacles exist, for example, in cases where inefficient and disproportionately burdensome procedures exist to relieve excess taxes withheld at source on dividend or interest income paid on shares or bonds traded publicly to non-resident investors;
• in order to strengthen EU States’ ability to prevent and fight potential tax fraud or abuse, which is currently hampered by a general lack of reliable and timely information on investors, it is necessary to provide the possibility of a common framework for the relief of excess withholding taxes on cross-border investments in securities that are resilient to a risk of tax fraud or abuse. This framework should lead to convergence among the various relief procedures applied in the UE States while ensuring transparency and certainty on investors’ identity for securities’ issuers, withholding tax agents, financial intermediaries and Member States, as the case may be.

Double Taxation

The withholding tax initiative will make tax relief procedures faster, simpler and, at the same time, safer.

Currently:

• where cross-border investments are concerned, many EU States levy taxes on dividends (from equities and shares) and interests (on bonds) paid to investors who live abroad. At the same time, those investors have to pay income tax in their country of residence on the same income;
• although treaties between member states aim to solve the issue of double taxation, in reality the procedures to claim withholding tax relief vary considerably from one member states to another, which results in relief or refund procedures being lengthy, costly and cumbersome. These procedures can also be vulnerable to large-scale tax fraud.​

Common tax residence certificate

The Directive will introduce a common EU digital tax residence certificate (“eTRC”) that tax paying investors would be able to use in order to benefit from the fast-track procedures to obtain relief from withholding taxes.

EU States will provide an automated process to issue eTRC to a natural person or entity deemed resident in their jurisdiction for tax purposes.

EU States shall recognise an eTRC issued by another EU State as proof of residence of a taxpayer in that other Member State in accordance with paragraph 3, without prejudice to the possibility for Member States to prove the residence for tax purposes in their jurisdiction.

The eTRC shall:

• cover a period not exceeding the calendar year or the period of a fiscal year for which it is issued, as applicable in the issuing Member State;
• be valid for certifying the residence of such covered period unless the Member State issuing the eTRC has evidence that the person to which the eTRC refers is not resident for tax purposes in its jurisdiction during all or part of that period and that Member State completely or partially invalidates the eTRC.

EU States shall take the appropriate measures to require:

• a natural person or entity deemed resident in their jurisdiction for tax purposes to inform tax authorities issuing the eTRC about any change that could affect the validity or the content of the eTRC;
• that an eTRC is provided, where a proof of tax residence is required for an natural person or entity deemed resident for tax purposes in a Member State, for the purposes of the application of a relief at source system or a quick refund system in order to obtain relief of excess withholding tax on dividends paid for publicly traded shares, or interests paid for publicly traded bonds, if applicable, issued by a resident in their jurisdiction.

Fast-track procedures

The Directive allows EU States to have two fast-track procedures complementing the existing standard refund procedure for withholding taxes. This will make relief and refund processes faster and more closely harmonised across the EU.

Member states will have to use one or both of the following systems:

• a “relief-at-source” procedure where the relevant tax rate is applied at the time of payment of dividends or interest;
• a “quick refund” system where the reimbursement of overpaid withholding tax is granted within a set deadline.

The Council:

1) agreed that EU states must apply the fast-track procedures if they provide relief from excess withholding tax on dividends paid for publicly traded shares;

2) agreed that EU States will have an option to maintain their current  procedures, and not apply the Directive, if:

• they provide a comprehensive relief-at-source system applicable to the excess withholding tax on dividends paid for publicly traded shares issued by a resident in their jurisdiction and their market capitalisation ratio is below a threshold of 1,5% (as reported by ESMA). Neverhteless, if this ratio is exceeded for four consecutive years, all rules foreseen by the Directive will become irrevocably applicable. In such cases member states will have five years to transpose the rules of the Directive into national law. These features take into account the size of the financial markets of Member States, while also recognising that some Member States maintain national systems that are adequate for their current market conditions.
• they provide relief from excess withholding tax on interest paid for publicly traded bonds;
• introduced additional circumstances in which EU States may exclude, completely or partially, requests for withholding tax relief from the fast-track procedures, in order to perform further checks, with a view to preventing fraud;
• added provisions to the text regarding indirect investments for cases where the investor does not invest directly insecurities but through a collective investment undertaking.

These provisions ensure that legitimate investors such as certain collective investment undertakings or their investors have access to the fast-track procedures.

Under the new rules, certified financial intermediaries requesting relief on behalf of a registered owner will need to carry out due diligence regarding the registered owner’s eligibility to benefit from tax relief.