At its recent meeting on May 14, 2024, the ECOFIN Council reached an agreement on the EU Directive on the fastest and most secure relief of excess withholding taxes (the FASTER Directive).
The FASTER Directive aims to optimize withholding tax (WHT) procedures within the EU, while strengthening such procedures against the risk of tax fraud and abuse. In essence, the FASTER Directive introduces a common, digital tax residence certificate (eTRC) and the implementation of rapid WHT (“relief system at source” or “quick refund system”) procedures in all EU Member States. Standard domestic reimbursement systems will continue to exist, but will be subordinated to FASTER rules. Implementing the new WHT rapid procedures will require significant participation and significant responsibilities for certified financial intermediaries (CFIs).
Common Digital Tax Residency Certificates (ETRCs)
The FASTER Directive introduces ETRCs, which will be recognized by all Member States as proof of residence in connection with WHT relief procedures or other tax purposes. The content of the eTRCs will be standardized and will be readable by both humans and machines.
Member States must issue an eTRC within 14 calendar days from the submission of an application by a person resident in the corresponding Member State. The eTRC will be valid for a period not exceeding the calendar year or the period of the fiscal year for which it is issued, unless the issuing Member State has evidence that the person related to the eTRC is not a tax resident in its jurisdiction and cancels the eTRC.
WHT Quick Procedures
Under the FASTER Directive, Member States are required to provide relief from excess WHT on dividends paid for listed shares issued by a resident in their jurisdiction, unless the Member State has: (i) an applicable comprehensive source relief system; and (ii) a market capitalization ratio below 1.5% for at least one of the four consecutive years, as established in the last four publications of the European Securities and Markets Authority available on the deadline for transposition of the FASTER Directive. Member States that provide relief from excess WHT on interest paid on quoted bonds may choose to apply the WHT expedited procedures for such cases as well.
Where domestic WHT reimbursement procedures are covered by the scope of the FASTER Directive, Member States must implement one or a combination of the following two rapid procedures:
- Relief system at source: under which the reduced tax rate or the exemption applicable under the corresponding tax treaty or national legal provisions applies at the time of payment of dividends or interest.
- Fast reimbursement system: under which any excess WHT is reimbursed. Refund requests will be submitted by CFIs and processed by the tax authority of the home state within the second month following the month of payment of the dividend or interest. Thereafter, the excess WHT will be refunded within 60 calendar days after the end of the period to request a quick refund. When these refunds are not processed within these deadlines, Member States will apply interest for late payment when national legislation includes such provisions.
The Significant Role of CFIs
To benefit from the quick procedures under the FASTER Directive, investors will need to interact with CFIs, who will be required to assist with the quick procedures. In this context, CFIs must be registered in a national CFI registry. These national registries will include, on a mandatory basis, “large institutions” (as defined in EU Regulation (EU) 575/2013) that handle dividend payments and central securities depositories (as defined in Regulation (EU) 909/2014) that provide WHT agent services. In addition, national CFI registries may include, on a voluntary basis, smaller entities acting as CFIs (including those established in a third country jurisdiction).
Under the FASTER Directive, a number of specific obligations are imposed on CFIs, including verifying the tax residency of registered property owners and submitting requests for applicable quick procedures. In addition, CFIs will be subject to extensive reporting obligations to the competent tax authority regarding any payment of dividends or interest processed by them, in order to provide sufficient information to identify an investor's right to WHT relief and detect possible abuse scenarios.
Next Steps: FASTER, but Not Immediately
The FASTER Directive is expected to be formally published in the EU's Official Journal and to enter into force in autumn 2024. Member States are required to transpose the provisions of the FASTER Directive into their national legislation before December 31, 2028, with the application of domestic rules as of January 1, 2030.
The approval of the FASTER Directive by the ECOFIN Council marks a significant step towards modernization and efficiency in dividend repayment procedures within the European Union. The introduction of common digital tax residence certificates (ETRCs) and rapid tax withholding procedures promises to simplify and accelerate the tax relief process, benefiting both investors and tax authorities.
At the same time, the Directive strengthens safeguards against fraud and tax abuse, ensuring that the system is more secure and reliable. The active participation and accountability of certified financial intermediaries (CFIs) will be crucial for the success of this initiative, setting a new standard in tax administration within the EU.
With the implementation scheduled for 2030, Member States have time to adapt their systems and ensure a smooth transition to these new regulations. The FASTER Directive not only facilitates the dividend repayment process, but it also reflects an ongoing commitment by the EU to improve fiscal cooperation and financial integration among its members. This, in turn, strengthens the EU's position as an attractive and competitive market for global investors.
In this context, Dividend Refund, the leader in Spain in the recovery of double taxation for the distribution of international dividends, presents itself as the ideal partner to manage all these procedures under the new regulations, ensuring an efficient process that complies with the new European guidelines.
Source: Lexology
