The Council of the EU announced the adoption of the FASTER Directive, which 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 must now be published in the Official Journal of the EU to enter into force. Member states will need to adopt and publish the necessary laws, regulations and administrative provisions by 31 December 2028, and will be required to apply the provisions of the Directive from 1 January 2030.
“The FASTER directive will align our withholding tax relief procedures to make sure investors don’t pay double taxes on the returns from their cross-border investments in shares and bonds,” said Hungarian finance minister Mihály Varga.
“This is an important step towards deepening the capital markets union, as more efficient withholding tax procedures will encourage investment on the EU’s financial markets. They will also reduce administrative burden and make it easier to spot tax fraud.”
In respect of cross-border investments, many member states currently levy taxes on dividends from equities and shares and interests on bonds that are 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, the procedures to claim withholding tax relief vary considerably between member states, which can result in lengthy, costly and cumbersome relief or refund procedures. These procedures can also be vulnerable to large-scale tax fraud.
The FASTER directive will introduce a common EU digital tax residence certificate (eTRC) that tax paying investors will 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 eTRCs to natural persons or entities deemed resident in their jurisdiction for tax purposes.
The directive will allow member states to have two fast-track procedures complementing the existing standard refund procedure for withholding taxes:
· 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.
EU countries 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% (as reported by ESMA). If this ratio is exceeded for four consecutive years, however, 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 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.
The Council also added provisions 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 FASTER directive will set a standardised reporting obligation for financial intermediaries such as 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. This portal will act as a central dedicated website where the national registers will be accessible.
Member states will retain the necessary discretion when it comes to registering and removing certified financial intermediaries in specific cases and to adopting measures that concern them. Once registered, financial intermediaries will need to report the necessary information to the relevant tax authorities so that a 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 further added the potential of indirect 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.
Penalties will be imposed by member states where obligations under from this directive are not complied with.