New rules for EU withholding tax procedures under the EU FASTER Directive approved – what lies ahead?

The ECOFIN Council has reached agreement on the EU Directive on Faster and Safer Relief of Excess Withholding Taxes (the FASTER Directive) at its recent meeting on 14 May 2024. 

The FASTER Directive seeks to make withholding tax (WHT) procedures within the EU more efficient, while at the same time strengthening such procedures against the risk of tax fraud and abuse. Essentially, the FASTER Directive provides for the introduction of a common and digital tax residence certificate (eTRC) and the implementation of fast-track WHT procedures (‘relief at source system’ or ‘quick refund system’) across EU Member States. Domestic standard refund systems will remain in place, but shall be subordinate to the FASTER rules. The processing of the newly introduced fast-track WHT procedures will require heavy involvement of, and significant responsibilities for, certified financial intermediaries (CFIs) (discussed in further detail below).  

Common digital tax residence certificate (eTRCs)

The FASTER Directive introduces eTRCs, which will be recognised by all Member States as proof of residence with respect to WHT relief procedures or other tax purposes. The content of eTRCs is intended to be standardised, human and machine-readable. 

Member States are expected to issue an eTRC within 14 calendar days from submission of a request filed by the person resident in the relevant Member State. The eTRC shall be valid for a period not exceeding the calendar year or the period of a fiscal year for which it is issued, unless the Member State issuing it has evidence that the person related to the eTRC is not tax resident in its jurisdiction and invalidates the eTRC. 

Fast-track WHT procedures

Under the FASTER Directive, Member States are obliged to provide a relief of excess WHT on dividends paid for publicly traded shares issued by a resident in their jurisdiction, unless the Member State has: (i) an applicable comprehensive relief at source system; and (ii) a market capitalisation ratio below 1.5% for at least one of the four consecutive years, as set out in the four latest publications by the European Securities and Markets Authority available on the deadline of transposition of the FASTER Directive. Member States that provide relief of excess WHT on interest paid for publicly traded bonds may opt to apply the fast-track WHT procedures for such cases as well. 

Where domestic WHT refund procedures are covered by the scope of the FASTER Directive, Member States will have to implement either one or a combination of the following two fast-track procedures: 

1. relief at source system: under which the reduced tax rate or exemption applicable under the relevant double tax treaty or domestic statutory provisions is applied at the time of payment of dividends or interest; and/or
2. quick refund system: under which any excess WHT is refunded. Requests for refunds will be submitted by CFIs and processed by the tax authority of the source state within the second month following the month of the payment date of the dividend or interest. Subsequently, the excess WHT will be refunded within 60 calendar days after the end of the period to request the quick refund. When these refunds are not processed within these deadlines, Member States shall apply late payment interest where national legislation includes such provisions.

Member States are able to exclude, completely or partially, requests for relief, where, for instance, the dividend payment on the underlying securities for which a relief is requested is linked to a financial arrangement (e.g. stock lending transactions or repos) that has not been settled, expired or otherwise terminated before the ex-dividend date. In addition, the FASTER Directive provides for a threshold exemption, whereby both fast-track procedures can be excluded by Member States if the dividend payment exceeds a gross amount of EUR100,000 per registered owner and per payment date. 

With respect to investors that do not invest directly in securities, but rather through collective investment undertakings (such as e.g. investment funds), the FASTER Directive stipulates special provisions to provide relief in cases where collective investment undertakings or their investors may be entitled to relief, but are not the registered owner because the underlying securities are held by a different legal person or by a fiscal transparent collective investment undertaking. 

WHT refund procedures which are not covered by the scope of the FASTER Directive (e.g. WHT on dividends paid out on non-publicly traded shares) shall be subject to (already existing) standard refund systems according to the domestic laws of the Member States. 

The significant role of CFIs

To benefit from the fast-track procedures under the FASTER Directive, investors will need to engage with CFIs who will be obliged to assist with the fast-track procedures. In this context, CFIs shall be required to be recorded in a national register for CFIs. Such national registers shall include, on a compulsory basis, ‘large institutions’ (as defined in the EU-Regulation (EU) 575/2013) that handle payments of dividends and central securities depositories (as defined in Regulation (EU) 909/2014) that provide WHT agent services. In addition, national CFI registers may include, on a voluntary basis, smaller entities acting as CFIs as well (including those that are established in a third country jurisdiction). 

Under the FASTER Directive, a number of specific obligations are imposed on CFIs as summarised below:

• Those CFIs that maintain the investment account of a registered owner receiving dividends or interests will be required to request the applicable fast-track procedure (i.e. the relief at source system or the quick refund system).
• In order to do this, CFIs will be required to obtain from the registered owner a declaration that the owner: (i) is entitled to the relief of WHT in line with the national legislation of the source state or a double tax treaty, (ii) is the beneficial owner of underlying securities, if required, in accordance with the national legislation of the source state, (iii) has/has not engaged in a financial arrangement linked to the underlying publicly traded share that has not been settled, expired or otherwise terminated before the ex-dividend date, and (iv) undertakes to inform the CFI of any change in circumstances without undue delay.
• CFIs will also be required to verify, based on the information available to them, the tax residency of the registered owners (i.e. the eTRC or a proof of tax residence in a third country deemed appropriate by the source state) or that the registered owner's entitlement to a specific reduced WHT rate is in line with the applicable double taxation treaty or specific national legislation of the source member state.
• Further, CFIs will be subject to comprehensive reporting obligations to the competent tax authority with respect to any dividend or interest payments processed by them. The intention is that these reporting requirements will provide the competent tax authorities with sufficient information to be able to identify the WHT relief entitlement of an investor as well as to detect potential abuse scenarios.  

Under the FASTER Directive penalties can be imposed on CFIs by Member States in cases where CFIs do not comply with the applicable obligations. In addition, the FASTER Directive requires Member States to ensure that CFIs that do not comply with their obligations as stipulated under the FASTER Directive can be held liable for all of part of the loss of WHT. 

Next steps: FASTER, but not immediately

It is expected that the FASTER Directive will formally being published in the EU's Official Journal and then enter in force in autumn 2024. Member States are obliged to transpose the provisions of the FASTER Directive into their domestic legislation by 31 December 2028, but there is then some time-lag as the domestic rules will only apply from 1 January 2030.