The FASTER Proposal has been adopted by the European Parliament, with some key changes

Within the EU, no two withholding tax relief procedures are the same.

Each country has its own procedures, relief forms, statute of limitations, and its own take on what supporting documentation should be submitted. However, efforts toward streamlining this process have been underway: the European Commission's FASTER proposal aims to establish a cohesive framework for withholding tax across the EU. At the end of February 2024, the FASTER directive was revised and approved by the European Parliament, with some key changes that will be discussed in this newsletter.?

Challenges of securing WHT relief

Generally, all cross-border portfolio investment triggers “withholding taxes” (WHT) in the source country, where the funds are invested. Withholding taxes are applied mainly because, without them, the foreign investor would benefit from the infrastructure and productivity of the source country without contributing to it. The most common withholding taxes are those on dividends (from equity investments) and interest (from debt investments). or the paying agent) or by retrospective reclaims (by – or on behalf of – the investor), is often available based on domestic law, tax treaties, the EU treaty, or less well-known legal bases. The type of relief, and the degree of relief – from a reduction of the rate to a full exemption or refund – depends on the type of investor, and the way in which investments are structured.?

Monetizing this tax relief means following strict and complex procedures in the source country. And this is where the problem comes in. Knowing your way around and complying with all of these different procedures required by each EU country causes tremendous compliance costs for investors and, in the worst case scenario, double taxation (or single taxation where there should have been no taxation, like in the case of tax exempt entities such as pension funds and charities), as the income is also taxed both in the source country and in the investor’s country of residence.?

This issue has been recognized since the beginning of this century by leading institutions on international taxation like the OECD and the European Commission (“EC”). In 2016, the EC’s Joint Research Centre calculated the annual cost of this issue to amount to EUR 8.4 billion in foregone tax relief, costs or reclaim procedures and opportunity costs. Numerous vast research reports, recommendations, and even implementation packages spelling out what standardized and unified relief procedures should look like, have brought no unification, or even harmonization, in this field to the EU whatsoever. Until 2021, when the EC started the work on what has become known as the FASTER proposal.?

The European Parliament's revisions of the FASTER directive

On 28 September 2021, the European Commission released its roadmap to a common EU-wide system for withholding tax on dividend or interest payments. After becoming an official proposal on 19 June 2023, it was amended and approved by the European Parliament on 28 February 2024.?

The structure??

The EU directive is structured in two building blocks, covered in chapters 2 and 3, respectively. Chapter 2 provides for the creation of an?EU-wide digital tax residence certificate, whilst Chapter 3 deals with the?WHT relief procedures. It includes the procedure to establish National Registers for specific financial intermediaries (Certified Financial Intermediary – CFI), standardized reporting obligation for such CFI, and the obligation for Member States to set up a relief at source system or a quick refund system or a combination of both to ensure swift and secure relief from WHT, based on DTT or domestic rules, for EU and non-EU investors, when certain transparency conditions are met.?

COMMON DIGITAL TAX RESIDENCE CERTIFICATE (ETRC)?

The eTRC is to be introduced by all Member States and will provide a? fast, easy, and secure administrative process to confirm EU taxpayers’ tax residency. As laid down in Article 4 there will be a common content for the eTRC, regardless of the issuing Member State. These common elements are established in paragraph 2 and are those identifying the requesting taxpayer and confirming that they are resident in the Member States according to its national rules.? The Member State of the investment does not need to be mentioned in the eTRC, as targeted consultations with Member States revealed that in terms of establishing investor residency, the same rules apply to deem the investor resident or not in a given Member State, regardless of the country of investment.?

The eTRC will cover at least the full calendar year in which it is requested. Establishing a minimum covered period of the eTRC (one calendar year) should not be interpreted as an attempt to prevent Member States from issuing eTRC with a longer covered period based on the concept of tax residence and the internal decision of each Member State.?

Although in the initial proposal Member States were required to issue an eTRC within one day, the European Parliament has extended this to a three-day issuance period.

To meet the issuance requirements,?Member States should implement?a fully automated system to issue the eTRC, which will allow for requests via an online portal accessible to the taxpayer and authorized parties. The eTRC will be secured using an electronic seal in conformity with Regulation (EU) No 910/2014 of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market (the eIDAS Regulation).?

MEMBER STATES’ NATIONAL REGISTERS?

In order to benefit from the WHT relief procedures at the core of the Directive,?investors will need to be able to engage with financial intermediaries that are certified to provide those services. There are two grounds for being certified as a Certified Financial Intermediary (CFI) and thus accessing the procedures of this Directive:?

• On a compulsory basis - For (1) large institutions and (2) Central Securities Depositories that are providing withholding tax agent services and that as such need to register with those Member States in which securities’ issuers are located and where any of their clients have invested in.?

• On a voluntary basis?- For all other entities (including those that are established in a third country jurisdiction) acting as financial intermediaries and meeting specific requirements by registering in one or several of the National Registers set up in accordance with this Directive, at the discretion of the concerned intermediary; it is expected that registration should be with those Member States where their clients have investments in.?

Common reporting?

This Directive aims to help in the fight against tax fraud and abuse in the field of excess WHT relief procedures and to make these procedures effective?through the introduction of transparency in the financial chain. This enables the source Member State to receive the information they need to check that the correct WHT rate applies and to assess whether to apply anti-abuse rules.?

WHO HAS TO REPORT AND TO WHOM??

The reporting obligations derive from the registration in one of the National Registers. All CFIs included in one or more of the National Registers are subject to reporting to the authority maintaining the register, and where applicable to the withholding tax agent, regardless of their country of residence (EU or outside the EU; or in a Member State with or without an own National Register in place). CFIs registered in any National Register need to report where their clients’ investment takes place in a Member State that has a National Register.?

The European Parliament has adjusted the role CFIs play by increasing their responsibilities, particularly around the reporting and verification processes. According to the updated text, the European Parliament recommends raising the threshold for exemption from reporting for CFIs. Specifically, CFIs would only need to report if dividends paid exceed EUR 1500, an increase from the original EUR 1000 threshold. Additionally, the new reporting requirements stipulate that CFIs must submit the necessary data within a maximum of 20 calendar days after the recorded date and maintain this data for six years thereafter. ?

By refining the roles and processes for Certified Financial Intermediaries (CFIs), the EP aims to enhance the speed and security of tax relief measures. Lastly, the amendments made by the EP place a greater emphasis on data protection, reducing the period for which personal data is retained.?

WHAT HAS TO BE REPORTED??

The Directive lays down a common set of reporting elements in Annex II. Each CFI shall report only on the part of the transaction that is visible for it, i.e. from whom it is receiving the dividend/interest and to whom it is paying the dividend/interest. The information reported to the tax administration will enable it to ascertain the identity of the final investor and his/her potential entitlement to the reduced WHT rate.?

Heading E of Annex II provides?two reporting requirements?that are aimed at helping to combat WHT abuse, mainly (Cum/Cum abuse?schemes):?

(i) information about the holding period of underlying securities:?to understand whether the underlying securities have been bought within 2 days before the ex-dividend date, with the objective of helping prevent further fraudulent/abusive schemes for multiple reclaims of the same WHT when only one single reclaim should apply (Cum/Ex schemes).?

(ii)?information about financial arrangements?linked to the securities for which the taxpayer is requesting relief:?to analyze whether the reporting financial intermediary is aware of any financial arrangement involving the underlying securities such as a repurchase agreement (repo) or securities lending, but also derivatives products such as single stock futures.?

As the above schemes have been observed only in relation to dividend payments, the reporting elements under Heading E are not required in relation to interest paid on bonds. The same approach is followed with regard to very low amounts of dividends paid, which are considered to be low-risk cases that cannot justify the relevant reporting burden on CFIs.?

HOW WILL THE REPORTING TAKE PLACE??

The reporting will take place via a standardized XML format scheme?that will be set out in an implementing act to be adopted by the Commission. The automated channel to deliver the information from the economic operators to the corresponding tax administration or WHT agent acting on its behalf will be standardized and set out in this implementing act.?

WHEN IS THE REPORTING OBLIGATION ARISING??

The timeline to report the information comprised in Annex II is? 25 days at the latest from the record date. In Member States where relief at source will apply and the dividend payment date is earlier than 25 days from the record date, the financial intermediaries should have a mechanism in place to provide information to the WHT agent on the rate to be applied.?

Systems of relief?

The proposal provides:?

(a) a relief at the source system?under which?the WHT agent applies?the correct amount of taxes at the time of the dividend/interest payment (article 12).?

(b) a quick refund system?under which the tax is withheld at the higher rate applied in the source country, but the excess tax is then given back within a set time frame of a maximum of 25 days from the date of the request or from the date when the required reporting is fulfilled, whichever the latest. This should take place within 50 calendar days from the payment date.?

Each Member State that applies relief procedures for excess withholding tax may decide to apply the relief at source, quick refund system, or both?as well as decide whether or not to use the above outsourcing possibility. Within these two systems, Member States have the discretion, for instance, to only allow low-risk taxpayers to request relief at source whilst other taxpayers can only request a quick refund.?

Where the relief at source and quick refund systems set out in this Directive do not apply, a standard refund procedure will be applied where the taxpayer or its appointed representative (which does not necessarily have to be a financial institution) is able to directly request a refund to the tax authority. This Directive also ensures that at least the content of the information to be reported to the tax authority will cover the information envisaged under heading E of Annex II.?

Next Steps and entry into force?

This proposal, once adopted unanimously by all Member States, should be transposed into Member States’ national law?by 31 December 2026. It should come into effect two years after the implementing acts have been adopted, which is expected to be by 1 January 2027.?

Links to the various documents of the Proposal can be found by?clicking here.?