The EU’s proposed directive on the faster and safer relief of excess withholding taxes—known as FASTER—is a key step in helping to boost cross-border investment, fight tax fraud, and improve the functioning of capital markets within the EU. The Economic and Financial Affairs Council of the EU, ECOFIN, reached agreement May 14 on the proposed directive, and it’s expected to be formally adopted by the EU Council in early 2025.
The EU institutions involved in the FASTER initiative aim for it to make the currently fragmented withholding tax systems for dividends and interests on publicly traded instruments within the EU more efficient, secure, and simple for investors, financial intermediaries, and tax authorities.
Harmonizing these procedures should also improve the functioning of the capital markets union, assist in fighting tax fraud, and make investing in other countries easier.
In addition to streamlining reclaim processes, the initiative is also expected to result in savings for certain investors with cross-border investments—although costs will likely increase for all investors involved.
However, only time will tell if these expectations and aims can become a reality.
EU digital tax residence certificate. The directive will introduce a common EU digital tax residence certificate, the eTRC, to replace the paper-based procedures currently used by most EU member countries. With a maximum validity of one year, the eTRC will be used by investors to benefit from the fast-track procedures, making them simpler, faster, and more efficient, and will be particularly beneficial to investors with a diversified portfolio across the EU.
There is a required timeline to issue the eTRC under the automated process within 14 days of a request. This is longer than previously envisaged—the European Commission had originally proposed one day after the request—but it will still be a substantial improvement on the delays often experienced by investors in some EU countries.
Fast-track procedures. Another key action outlined in the directive to make withholding tax relief processes across the EU faster, simpler, and more harmonized is the implementation by countries of one of two fast-track procedures, or a combination of both.
The first procedure is based on a “relief at source” model, which will involve applying withholding tax at the lower rate at the time of payment. The alternative procedure will involve withholding tax being applied as normal followed by a “quick refund” of any overpaid tax, based on strict timelines.
The fast-track procedures should result in savings to cross-border investors estimated to exceed 5 billion euros ($5.3 billion) per year.
Not all EU countries will be required to implement this measure: It won’t apply where a country has a comprehensive relief at source system in place already and a market capitalization ratio of 1.5% or more for four consecutive years.
While this exclusion does detract from the intended harmonization of withholding tax systems, it should be welcomed as reflecting the need for proportionality.
Another positive element of the directive is the inclusion of criteria for an EU country’s system to be considered comprehensive in nature, including that it provides access to relief to any natural person or entity that is entitled to a relief in accordance with that jurisdiction’s domestic law or a double tax treaty. This should assist in mitigating the risk of disputes arising between the EU and individual countries in the future.
This hadn’t been initially proposed by the EU Commission, and the criteria should act as a clear signpost for EU countries that already have a robust relief at source system in place and want to maintain this system rather than implement the fast-track procedures.
Role of certified financial intermediaries. Before investors can benefit from fast-track procedures they will need to engage with CFIs, such as large institutions handling payments of dividends and central securities depositaries acting as withholding tax agents for such payments, to assist with the process.
National registers for CFIs will be created for the certification process (with other, smaller entities acting as CFIs being entitled to register voluntarily) and the EU will develop a portal to act as a single entry point.
CFIs will play a pivotal role in the operation of the fast-track procedures. This will involve new and demanding compliance obligations, including implementing due diligence procedures such as assessing eligibility for tax relief; verifying beneficial ownership; and reporting standardized information to national tax authorities.
These obligations, and the potential liability for CFIs for failing to comply with them, could impact the overall success of the FASTER initiative and the EU’s goals.
Implementation and associated challenges. The directive is expected to be formally adopted by the EU Council in early 2025 after the European Parliament has provided its opinion on the final text.
EU countries will then need to transpose the directive into their domestic law by the end of 2028, with the rules taking effect from Jan. 1, 2030.
The way the FASTER directive is implemented in EU countries will be crucial to achieving the expectations and aims of this initiative. For example, the effort to harmonize will be negatively impacted where a country seeks to impose more stringent requirements than those outlined in the directive as part of its preferred fast-track procedure.
Beyond the intricacies arising as part of the domestic transposition by the EU countries, perhaps the biggest challenge for investors will be adapting to the new processes implemented as a result of the directive.
While some investors are expected to make savings—mainly those who currently suffer withholding tax on their foreign investments but have no scope to recover the tax—it is also inevitable that increased costs will arise as part of this exercise. This will likely be driven in large part by the new and burdensome demands placed on CFIs, as discussed above. For many investors though, this may represent a small price to pay for the better functioning of capital markets.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Robert Dever leads the Irish tax practice of Pinsent Masons, advising large domestic and multinational corporations on all aspects of Irish corporate and transactional tax.
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