The aim of the proposal is to make withholding tax (WHT) procedures in the EU more efficient and secure for investors, financial intermediaries, and local tax authorities. The draft Directive gives Member States a choice between implementing a quick refund system, a relief at source system or a combination of the two, as well as the introduction of additional registration and reporting requirements for financial intermediaries. The proposal is now open to feedback from interested stakeholders.
Simplification of WHT administration has been high on the agenda of the OECD and European Commission for more than a decade. Previous progress in this space was achieved at OECD level with the approval of the Treaty Relief and Compliance Enhancement (TRACE) implementation package in 2013. The FASTER initiative now looks to build on this and aims to harmonise approach to WHT administration across the EU.
The path to this draft Directive started on April 1, 2022, when the EC launched a public consultation regarding a new initiative that would introduce a common EU-wide system for withholding tax on dividend and interest payments. The primary objectives of this initiative were to (i) shorten the time for relieving and refunding excess WHT (ii) ensure that financial intermediaries adhere to customer due diligence and related reporting requirements (iii) prevent abusive WHT practices and (iv) equip tax authorities with the tools to deal with refund and relief at source procedures in a secure and timely manner.
To achieve these objectives, the EC considered three potential approaches to a harmonized WHT system:
- The implementation of a Common EU digital tax residence certificate alongside common reporting for financial intermediaries. This would involve the implementation of standardized due diligence procedures, common rules for liability allocation and the option for financial intermediaries to file requests on behalf of taxpayers.
- The introduction of a relief at source system. This would have built on the elements in the first option while also implementing an EU level relief at source system which would apply the reduced WHT rate directly at source at the time of interest or dividend payment.
- The implementation of a quick refund system within a set time frame and/or a Relief at Source system. This would also incorporate the added reporting and due diligence requirements of option one.
According to the explanatory memorandum, the EC compared the various approaches considering effectiveness, efficiency, coherence, and proportionality. Ultimately, it was decided that the third approach was preferable, given that it would be highly effective to tackle the problems identified in the EU in terms of speed, simpler processes, and more digitalized procedures. The proposed Directive has been drafted as such.
The proposed Directive is structured into four Chapters that set proposed rules which are summarised separately below:
1. Proposed WHT Relief Systems: the proposal outlines two possible systems of relief that Member States may apply – either a full relief at source system or a quick refund system requiring any refund of excess withholding tax due to be issued no later than 50 calendar days from the payment date. Either of these options can be applied (including a combination of both) however Member States would be required to ensure at least one of the options is available to all investors in respect of certain payments (e.g. dividends in relation to publicly traded shares)
2. Requirements to Avail of WHT Relief Systems: the proposed Directive outlines a number of requirements that investors must satisfy in order to avail of the benefits. These requirements include the need to provide evidence of tax residency by obtaining an EU digital tax residence certificate (which is a new concept) and engaging with a Certified Financial Intermediary (CFI), which is discussed further below.
3. Anti-Abuse Provisions: the proposed Directive has specifically scoped out certain transactions with a view to preventing abusive practices. The benefits of the fast-track procedures would therefore not be available to investors in a number of circumstances e.g. where the dividend has been paid in respect of a publicly traded share that the investor acquired within two days before the ex-dividend date, or the dividend payment on the underlying security for which relief is requested is linked to a financial arrangement that has not been settled, expired or otherwise terminated at the ex-dividend date.
4. Financial Intermediaries: Registration, Due Diligence and Reporting Requirements: the proposal introduces the concept of a CFI, which broadly places an obligation on intermediaries to register on a national register of Member States in which their clients hold investments, in addition to obtaining and verifying certain information from investors (e.g. obtaining a beneficial ownership declaration and verifying their tax residency against information collected for AML purposes). A CFI will also be subject to additional reporting obligations and subject to penalties for non-compliance.
Practical Implications and Next Steps
If this legislation is introduced as drafted, it should help to streamline and alleviate the current inefficiencies faced by investors in accessing reduced withholding tax rates in certain markets, in addition to providing a more harmonised approach. However, at the same time it would have a significant impact on financial intermediaries and likely necessitate material amendments to existing processes.
A consultation process on this proposal was launched by the EC to seek feedback from interested stakeholders on the proposed revisions. The public consultation was announced as running for an eight-week feedback period starting from June 19, 2023, however the deadline will be extended daily until the proposal is available in all EU languages (refer to the public consultation webpage for the most up to date information on the deadline).
In the longer term, the Directive requires unanimous approval across the European Council before it can be passed into law. In addition, the Council would only be allowed to adopt the text once the European Parliament and any relevant Committees have given their (non-binding) opinions. As a result, it is possible there could be further change in advance of any legislation being passed into law and the earliest we expect any proposal to come into force is January 1, 2027.
Source: KPMG Ireland