“FASTER” Directive Proposal 

Proposal for a Council Directive published on 19 June 2023 on Faster and Safer Relief of Excess Withholding Taxes (“FASTER Proposal”) seeks to make withholding tax (“WHT”) procedures in the EU more efficient and secure for investors, financial intermediaries (such as banks) and Member States’ tax administrations while simultaneously fighting against tax fraud. In this respect, the requirement to issue a digital certificate of tax residence (eTRC) within one day is obviously a relevant solution to achieve this. However, in order to mitigate potential abuses, the Faster Proposal also includes extensive standardised reporting and due diligence obligations for the Certified Financial Intermediary (“CFI”). In attempting to create a solution to WHT refund in the line of TRACE¹ , the Faster Proposal could lead to its downfall in view of the contemplated burden on CFIs and liability associated therewith, and ultimately its actual real benefit would be the eTRC. 

Fast-track procedures

At its core, the FASTER Proposal provides that the existing standard WHT refund procedure (considered as slow and burdensome in many ways from the perspective of both investors and the national tax administrations) would be supplemented by two fast-track procedures, the “relief at source” and the “quick refund” systems, which would make the relief process smoother and more uniform across the EU. Member States would have the option of selecting the preferred system and they could even combine both:

• The “relief at source” procedure directly employs the tax rate based on the applicable double taxation treaty provisions, during the payment of dividends or interest;
• Under the “quick refund” process, WHT will be fully paid at source. However, any refund due to overpaid taxes will be granted within 50 days of payment.

Such simplified WHT refund procedures would target excess WHT on dividend on publicly traded shares²  to non-resident investors within or outside the EU.

Implementation

The fast-track procedures would be achievable through the following key actions proposed by the FASTER Proposal:

(i) The creation of a common EU digital tax residence certificate (“eTRC”)

EU-based investors who possess a diversified EU portfolio require only one eTRC within the EU. Member States would be required to issue an eTRC within one working day from submission of a request (as long as they have been provided with a specific set of information and provided that no exceptional circumstances occur justifying a delay). Such eTRC would be valid for at least the full calendar year in which it is requested, and it would be accessible to taxpayers and CFIs on behalf of their clients.

(ii) Member States’ national register for CFIs and standardized reporting and due diligence obligation for such CFIs

1. Registration

Investors would need to engage with financial intermediaries that are certified (i.e. CFIs) to provide the WHT services. To be certified, CFIs will need to register with their Member State’ national register. There are two grounds for being CFIs:

• On a compulsory basis for all large institutions as defined in point (146) of Article 4(1) of Regulation (EU) No 575/2013 (i.e. credit institutions and investment firms) which process payments of dividends and, where applicable, interest on securities originating within their jurisdiction, as well as central securities depositories referred to in Article 3(4) of the FASTER Proposal which provide withholding agent services for the same payments; and
• On a voluntary basis for all other financial intermediaries (including those established in a third country jurisdiction) and meeting certain requirements.

Financial intermediaries which do not satisfy with the registration requirements may be subject to penalties.

1. Reporting and due diligence obligations

Reporting obligation

Another purpose of the FASTER Proposal is to trace payment flows up to the ultimate investors through the chain of financial intermediaries in order to provide national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse. As a result, the CFIs are subject to certain reporting and due diligence obligations regarding “registered owners” (defined in the FASTER Proposal as any natural or legal person that is entitled to receive dividend or interest income from securities subject to tax withheld at source in a Member State).

Therefore, CFIs would be required to report to the competent authority information referred to in Annex II of the FASTER Proposal, as soon as possible after the registration date, i.e. information concerning the person providing the information, the recipient of the dividend or interest payment, the payer initiating the dividend or interest payment, the dividend or interest payment, the application of anti-abuse measures (e.g. information on the holding period of the underlying listed shares or financial agreement). CFIs would be required by Member States in which they are registered to keep the documentation supporting the information reported for five years and to provide access to any other information, as well as access to their premises for audit purposes and to delete or anonymize any personal data included in such documentation as soon as the audit has been completed and at the latest five years after reporting.

Due diligence obligation

Pursuant to the FASTER Proposal, CFIs must implement satisfactory procedures to confirm that registered owners are eligible for tax reliefs when requesting them on their behalf.

Member States would ensure that CFIs requesting relief under the FASTER Proposal on behalf of a registered owner obtain from them a declaration that the registered owner: (i) is the beneficial owner of the dividend or interest as defined under the national legislation of the source Member State and (ii) has not engaged in a financial arrangement linked to the underlying publicly traded share that has not been settled, expired or otherwise terminated at the ex-dividend date. In addition, CFIs requesting such relief on behalf of the registered owner would have to verify the following key items:

1. (i) the eTRC of the registered owner and/or appropriate proof of tax residence in a third country;
2. (ii) the registered owner’s declaration and tax residence against information from the internal control mechanisms used by the certified financial intermediary in order to comply with the obligations in relation to money laundering and terrorist financing under Directive (EU) 2015/84943 or comparable information required in third countries;
3. (iii) the registered owner’s entitlement to a specific reduced WHT rate in accordance with a double tax treaty between the source Member State and the jurisdictions where the registered owner is resident for tax purposes or specific national legislation of the source Member State;
4. (iv) in case of a dividend payment and based on the information available to the CFI, the possible existence of any financial arrangement that has not been settled, expired or otherwise terminated at the ex-dividend date, unless the dividend paid to the registered owner for each group of identical shares held does not exceed EUR 1,000.

Conditions to benefit from a “relief at source” or a “quick refund”

CFIs maintaining the investment account of a registered owner would request the benefit of the system of relief, on behalf of such registered owner, if:

1. (i) the registered owner has authorised the CFI to request relief on its behalf; and
2. (ii) the CFI has verified and established the registered owner’s eligibility in accordance with Article 11 of the FASTER Proposal. Such verification may also include a risk assessment that takes into account the credit risk and fraud risk.

In certain cases, a Member State would not provide relief or exclude requests from the “relief at source” or “quick refund” if certain conditions are met.

Entry into force

The Economic and Financial Affairs’ report of 30 November 2023 shows that a technical analysis of the FASTER Proposal and discussions with Member States led to a number of amendments to the initial text (e.g. adaptation of rules applicable to the issuance of the tax residence certificate, clarification of the conditions under which requests for quick refund can be rejected by Member States). Ultimately, according to the report, further technical work is required before the FASTER Proposal can be submitted to the Council for approval.

This FASTER Proposal, once adopted, should be transposed into Member States’ national law by 31 December 2026. It should come into effect on 1 January 2027.