Christoph Hawlitschek LL.M. (San Francisco)

Introduction

On 19 June 2023, the European Commission published a proposal for a Council Directive “On Faster and Safer Relief of Excess Withholding Taxes”, or simply the “FASTER Directive”. This Directive aims to make withholding tax procedures in the EU more efficient and to combat tax fraud and abuse.

Member States must ratify the necessary national laws to comply with the Directive by 31 December 2026 and apply those provisions from 1 January 2027.

Practical challenges of withholding tax relief in the EU

Cross-border investors are generally subject to double taxation on income from dividends and interest, having to pay income tax in both the residence and the source country. To eliminate being taxed twice on their income, double taxation treaties have been signed between virtually all EU Member States to allow non-resident investors to be exempt from withholding tax or obtain reduced rates.

However, the current system of relief is not only inefficient, leading to costly and lengthy procedures, but also at high risk of abuse, leading to revenue losses for Member States. These issues stem from the lack of uniformity in digitisation and processes between Member States and the lack of information available to tax administrations.

As a result of these inefficiencies, taxpayers often give up their right to recover excess taxes and are ultimately tend to sell their foreign EU stocks. This discourages cross-border investments within the EU and undermines the competitiveness of the EU market.

Goals of the Commission with FASTER

To address the difficulties in the process of withholding tax relief in the EU, the Commission has set several goals to be achieved with FASTER. To ensure fair taxation and reinforce the capital markets union, FASTER aims to facilitate cross-border investment and prevent tax abuse. More specifically, the initiative aims to make the withholding tax procedures more efficient and provide Member States with the appropriate tools they need in order to fight tax abuse.

The envisioned actions to achieve these goals consist of a common EU digital tax certificate, a register of certified financial intermediaries and two fast track procedures.

Digital tax residence certificate (eTRC)

In order to file for a reduction or exemption from withholding tax, taxpayers must provide the source Member State with a certificate proving their tax residence. Currently, most Member States still rely on paper-based procedures, making the process of requesting such a document slow and inefficient. 

Through the establishment of an eTRC, tax administrations will be required to provide the digital certificate to the taxpayer within one working day from submission. The content of the eTRC will also be standardised across Member States, in order to make the processing faster and more efficient. In case of investors with diversified portfolios, the eTRC will allow them to require only one certificate to claim several refunds within the same calendar year.

Register of certified financial intermediaries

Large EU financial intermediaries will be required to join a register of certified financial intermediaries. Smaller or non-EU financial intermediaries will also be eligible to join, however their participation will remain voluntary. Financial intermediaries will be required to report information on the payment of dividends or interest in order for tax administrations to trace the transaction. This enhances transparency and allows tax administrations to have the necessary tools to check the eligibility for reduced rates and to detect potential tax abuse.

Accelerated procedures for relief from withholding taxes

Two accelerated procedures to make the refund process faster and more harmonised across the EU will complement the already existing standard refund procedure. Member States will be able to choose between either procedure or a combination of the two.

Relief at source

The relief at source procedure requires that the applicable reduced withholding tax rates under the double taxation treaty will be applied directly at the time of payment of dividends or interest.

Quick refund

The quick refund procedure will consider the withholding tax rate of the Member State where the dividends or interest are paid at the time of the first payment. The refund for any excess tax is to be granted within 50 days from the date of payment.

Implications for taxpayers in Germany

These measures will be highly beneficial for cross-border investors. Thanks to the eTRC, investors will be able to submit a digital application for withholding tax relief, making the process easier, smoother, and faster. In addition, investors with diversified portfolios will only need to apply for one certificate per calendar year, rather than one certificate per refund request. Investors will therefore sustain less compliance costs, face less instances of double taxation, and be able to reinvest their refunds more promptly. The Commission estimates that these measures will save investors around 5.17 billion euros per year. It remains to be hoped, however, that the EU Commission will extend the scope of the directive in the further legislative process to include intra-group dividend and interest payments and, more generally, royalty payments that are not at risk of abuse.