European Commission proposes a Directive to standardise withholding tax procedures in the EU
Deloitte Malta Tax Alert
30 June 2023
On 19 June 2023, the European Commission proposed a new Directive on Faster and Safer Relief of Excess Withholding Taxes (‘FASTER’) aimed at making withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and tax administrations. The Directive also aims to remove obstacles to cross-border investment and to curb tax abuse. In this respect, FASTER proposes electronic tax residence certificates (‘eTRC’), reporting obligations for certified financial intermediaries and streamlined EU systems to relieve excess withholding tax on dividends from publicly traded shares and, where applicable, interest from publicly traded bonds paid to registered owners who are not tax resident in the same Member State.
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Implementation of a common eTRC
In terms of this proposal, Member States would be required to establish an automated process for issuing eTRCs to individuals and entities that are considered to be tax resident in that Member State.
If adopted, eTRCs would be issued within one working day from the submission of a request and would comply with certain technical requirements. Where the verification of the tax residence of a taxpayer takes more than one working day, the relevant Member State would be required to inform the applicant about the additional time required and the reasons for the delay.
In addition, an eTRC would cover at least the entire calendar year in which the request is made and should remain valid unless the Member State has evidence that the person is no longer resident in its jurisdiction.
Member States would recognise eTRCs issued by other Member States as sufficient proof of the taxpayer’s residence in the respective Member State.
National register of certified financial intermediaries
Member States that levy a withholding tax on dividends from publicly traded shares paid to registered owners that are resident for tax purposes outside that Member State and that provide relief of excess withholding tax would be required to implement a national public register of certified financial intermediaries. This register may also be used in relation to the relief of excess withholding tax on interest from publicly traded bonds.
Certain qualifying large institutions involved in the handling of payments of dividends and where relevant interest on securities, and central securities depositories providing withholding tax agent services for such payments, would be required to be registered. Other financial intermediaries would be allowed to request registration at their discretion. Member States would be obliged to effect registration within three months from application and to update the relevant website once a month.
Member States would require certified financial intermediaries to report specific information to the competent authority, in respect of which the intermediaries would be required to retain supporting documentation for five years. Said intermediaries would be obliged to provide access to any information and to their premises for audit purposes.
Systems of relief
Under FASTER, certified financial intermediaries maintaining the investment account of a registered owner receiving dividends or interest would request relief on behalf of such registered owner, subject to certain conditions using any or both of the following methods:
- Relief at source system – Member States may allow certified financial intermediaries to request relief at source on behalf a registered owner by providing the withholding tax agent with the registered owner's tax residence and applicable withholding tax rate.
- Quick refund system – Member States may allow certified financial intermediaries to request a quick refund of excess withholding tax on behalf of registered owners by ensuring that refund requests are processed within twenty-five calendar days from the request date or from the date on which the relevant intermediaries have met all reporting obligations. Interest on late payments would be applied for any delays beyond twenty-five calendar days.
Relief systems provided for in FASTER shall not be provided where:
- the dividend is paid on a publicly traded share that the registered owner acquired within a period of two days before the ex-dividend date; and
- 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.
In the event that FASTER is adopted as an EU Directive, the current timeline is for Member States to transpose the Directive by 31 December 2026 and apply it from 1 January 2027.
The adoption of FASTER would result in a requirement for Malta to establish an automated process for issuing digital tax residence certificates to individuals and entities considered tax resident in Malta, thus aligning and simplifying the issue of such certificates within the EU. Further, the proposed systems of relief would be beneficial to Maltese taxpayers seeking excess withholding tax relief from other EU Member States on qualifying income by streamlining such procedures on an EU level.
Further information can be accessed here.