European Union - Draft directive released on EU-wide withholding tax procedures

The European Commission published its proposal for a new directive on 19 June 2023 that is intended to make withholding tax procedures relating to dividends and interest more efficient and secure for investors, financial intermediaries and the tax administrations of the member states.

The proposed directive, entitled the “Faster and Safer Relief of Excess Withholding Taxes (FASTER) Directive,” aims to enhance investment in the bloc by making it easier for investors to obtain relief from withholding tax on income from dividends and interest. The proposals also include a number of anti-avoidance provisions. Relief procedures available under double tax treaties are currently protracted, differ in each member state and generally require refund requests to be submitted in hard copy. The proposed measures are designed to address these frustrations but also help to stem the loss of fiscal revenue from abuse of withholding tax rules and procedures.

The draft FASTER directive would introduce:

  • A common EU digital tax residence certificate that would allow investors to submit withholding tax relief requests electronically with a view to expediting the refund process. Taxpayers would only need one digital residence certificate that could be used for multiple refund requests during a calendar year.
  • Two fast-track procedures to complement the existing withholding tax relief procedure, i.e., (i) a relief at source procedure and (ii) a “quick refund” mechanism that also would expedite and harmonise the process throughout the EU. The relief at source procedure would allow the tax rate applied at the time dividends or interest are paid to be the rate under an applicable tax treaty. Under the quick refund procedure, the initial payment would be made taking into account the withholding tax rate of the member state where the payment is made, but a refund for overpaid tax would be granted within 50 days from the date of the payment. Member states would be able to elect to use either or both procedures.
  • A standardised reporting obligation that would give the tax authorities of the member states the means to determine eligibility for reduced withholding tax rates and to detect abuse. Certified financial intermediaries would be required to report payments of dividends or interest to the relevant tax authorities so they could track the transaction, and large EU financial intermediaries would have to join a national register of certified financial intermediaries. Taxpayers investing in the EU through certified intermediaries would benefit from the fast-track withholding tax procedures and avoid double taxation on dividend payments.

Although the Commission has insisted that the proposed FASTER directive is only procedural, as a tax initiative it will need to be approved unanimously by member states under the special legislative procedure (pursuant to article 115 of the Treaty on the Functioning of the European Union (TFEU)). Assuming the proposed directive is adopted, the Commission expects it to become effective on 1 January 2027.

Robert O’Hare
Susan Lyons

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