Global Daily Tax News, EU Council Agrees Landmark Withholding Tax Changes, (May 15, 2024)

At its meeting on May 14, the Economic and Financial Affairs Council reached an agreement (general approach) on reform of withholding tax procedures in the EU, to speed up refunds for taxpayers and protect the bloc from tax abuse.

The so-called FASTER initiative 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 directive will introduce a common EU digital tax residence certificate (eTRC) that tax-paying investors would be able to use to benefit from the fast-track procedures to obtain relief from withholding taxes.

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

The directive allows member 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 harmonized 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 agreed that member states must apply the fast-track procedures if they provide relief from excess withholding tax on dividends paid for publicly traded shares.

Member states will have an option to maintain their current procedures, and not apply Chapter III of 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 percent (as reported by ESMA). Nevertheless, 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.

• they provide relief from excess withholding tax on interest paid for publicly traded bonds.

The Council also introduced in the text additional circumstances in which member states may exclude, completely or partially, requests for withholding tax relief from the fast-track procedures, to perform further checks, with a view to preventing fraud.

In addition, the Council added provisions to the text regarding indirect investments for cases where the investor does not invest directly in securities 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.

The directive will set a standardized reporting obligation for financial intermediaries (like banks or investment platforms). This will make it easier for national tax authorities to detect potential tax fraud or abuse.

Member states will establish national registers where large (and optionally smaller) financial intermediaries will have to register to be certified. To simplify this registration procedure, the Council agreed to create a European Certified Financial Intermediary Portal. The portal will act as a central dedicated website where the national registers will be accessible.

Once registered, the financial intermediaries will need to report the necessary information to the relevant tax authorities so that the transaction can be traced. Member states will have the option of requesting more extensive reporting in relation to transactions with a view to detecting possible cases of tax abuse or fraud.

The Council added the possibility of indirect reporting in addition to direct reporting. Where the reporting is direct, a certified financial intermediary is to report directly to the competent authority of the source member state. Where the reporting is indirect, the information is to be provided by each of the certified financial intermediaries along the securities payment chain.

The Council agreed that penalties should be imposed by member states where obligations stemming from this directive are not complied with.