The Commission’s original proposal for a Directive on the Faster and Safer Relief of Excess Withholding Taxes (“FASTER”) was published on 19 June 2023 (see here for our previous article and further background). The proposal has two key aims. Firstly, strengthening the Capital Markets Union by making withholding tax (WHT) relief procedures faster, less burdensome and more digitalised. And secondly, making those procedures robust against tax fraud and abuse, particularly in light of dividend stripping schemes such as the cum/ex and cum/cum schemes.
A key driver for the FASTER proposal that was agreed on 14 May was the long processing times for WHT refund applications that were developing in several Member States due to extensive verification of entitlement by the national tax authorities. In Germany, for example, a recent parliamentary inquiry revealed that the average processing time for a German WHT refund application is 615 days although the law in the meantime provides for a statutory processing period of 90 days. One of the major points of dispute between taxpayers and the tax authorities of Member States was the allocation of beneficial ownership in the shares underlying the WHT refund application as well as the application of anti-abuse rules.
There have been previous attempts to speed up relief procedures going back to 2009 but this is the first time that the Commission has succeeded in achieving political agreement. And it was by no means easy. The file was a clear priority of both the previous Spanish Presidency of the Council of the European Union and the current Belgian Presidency. And it seems their perseverance has finally paid off, with the ninth compromise text on this proposal being published on 8 May and the Council reaching agreement at the ECOFIN meeting on 14 May. In this article, we take a look at what has been agreed including what has changed compared to the Commission’s original proposal from 2023.
What is FASTER?
FASTER provides that Member States must provide either relief at source or a quick refund of excess withholding tax on dividends from publicly traded shares issued by a resident of theirjurisdiction, where such dividend is paid to registered owners that are tax resident outside that Member State. Member States also have the option to extend the procedures to publicly traded bonds.
There is an exception to this general rule in relation to dividends. A Member State does not have to apply the procedures laid out in the Directive, if (i) it has its own comprehensive relief at source system that applies to these cases; and (ii) it has a market capitalisation ratio of less than 1.5 per cent for four consecutive years. The idea behind the second limb of the exclusion is that low market capitalisation implies low volumes of dividend distributions and a lower risk of tax abuse. Furthermore, it was felt that requiring such smaller markets to modify existing national systems where they already provide effective relief would not be proportionate. This limb was not in the Commission’s proposal and agreeing the appropriate threshold for this was one of the points that brought negotiations down to the wire.
Where a Member State does have to implement FASTER procedures, they must ensure that either relief at source is available by direct application of the appropriate tax rate at the time of withholding or provide for a quick refund system whereby a request is submitted by a relevant intermediary and processed within 60 days. If refunds are not processed within these deadlines, late payment interest may be payable by the Member State.
Member states that have an existing WHT relief procedure in place but exceed the market capitalisation threshold will have to ensure their procedures comply with the directive and must apply the other aspects of the directive (such as creating national registers of intermediaries and implementing reporting obligations, more on which below). However, they can still apply their existing national procedures for payments outside the scope of the directive, such as dividends paid to registered owners that are residents of the Member State or dividends on non-listed securities.
How will it work? Introducing eTRCs and CFIs
The two key features that are intended to enable these procedures to work are digital tax residence certificates (eTRCs) and a new role for “certified financial intermediaries” who will be required to do much of the heavy lifting for tax authorities in terms of taking responsibility for verifying eligibility for WHT relief.
Digital tax residence certificates (eTRCs)
The introduction of the eTRC is fundamental to streamlining the WHT process. It is intended to be standardised, human and machine-readable, and must be recognized by other Member States as proof of residence. As with many aspects of FASTER, timings have been slowed down, so instead of being issued within one working day of submission (as originally proposed) Member States must issue these within 14 days of receiving a request. Member States may also take longer if they inform the person of the reasons for the delay and the additional time needed, with no apparent cap on this.
One of the helpful aspects of the eTRC was that it had to be valid for at least a calendar year: the final compromise reverses this so now the period for which an eTRC is issued cannot exceed a year (and presumably could potentially be issued to cover a much shorter period). If the Member State has evidence that the person is not resident for all or part of the relevant period this can invalidate the eTRC and a taxpayers must notify tax authorities of any changes that could affect the validity or content of the eTRC.
Certified Financial Intermediaries (CFIs)
In order to benefit from the streamlined procedures, investors have to contract directly or indirectly with intermediaries that are registered on newly established national registers (CFIs). The list of financial intermediaries that are eligible to be CFIs remains broadly the same as under the original proposal (as to which see our previous briefing here) but with small adjustments for instance to include branches. Registration as a CFI is compulsory for large institutions that handle payments of dividends (or interest, where relevant) issued by a resident in their jurisdiction and for central securities depositories that are WHT agents for such payments. For other types of eligible intermediary, registration is optional.
A new invention since the original proposal is the European Certified Financial Intermediary Portal. This provides for a single entry point for intermediaries to apply for registration as a CFI on national registers and will allow for information exchange between Member States. There are provisions around when registrations can be rejected or withdrawn, for instance if there is non-compliance with the directive or the CFI has committed an offence under national law leading to a loss of WHT. The CFI must, however, be able to reapply if they remedy the issue.
New reporting obligations for CFIs
Once registered, CFIs will have to grapple with new reporting obligations. CFIs must report all the information provided for in the directive within the second month following the month of the payment date (a bit more palatable than the originally proposed 20 days from the record date).
This information that must be reported includes details relating to the payor and payee of a relevant payment and a range of information on the dividend or interest itself, together with information intended to help identify potential cases of abuse (there was originally a de minimis for reporting under this last category but this has been removed in the final proposal).
One change made by the Council was to provide for indirect reporting in addition to direct reporting. Where the reporting is direct, a CFI must report directly to the relevant tax authority. Where the reporting is indirect, the information is to be provided by each of the CFIs along the securities payment chain.
Standardised computerised forms will be developed in due course. CFIs will have to keep and provide access to any supporting documentation for ten years, but must delete or anonymise any personal data in such documentation once the audit is completed and at the latest 10 years after reporting. This will all need to be factored into new systems and processes for CFIs.
When can you apply for relief?
Article 10 of the Directive provides that the CFI that maintains the investment account of a registered owner must apply for WHT relief if that person has authorized them to do so (provided the CFI has verified they are entitled to relief). Provisions have also been added to address situations where an investor invests through a collective investment undertaking.
One of the most difficult aspects for Member States to agree on were the circumstances when Member States can exclude requests for relief under Article 10. These include potentially abusive features such as dividends paid on shares which have been acquired by the registered owner within five days before the ex-dividend date or where the dividend is linked to a financial arrangement (such as a future, repo, stock loan or derivative) that persists over an ex-dividend date.
In addition, there is an exclusion where the gross dividend exceeds EUR 100,000 per registered owner and payment date. There is a carve out of this exclusion for certain pension schemes, UCITS, EU AIFs and EU AIFMs, on the basis that these are highly regulated and therefore the risk of non-compliance and tax abuse or tax fraud is minimal.
Following much negotiation, it has been agreed that the various exemptions are to be applied at the discretion of each Member State. This means a Member State can decide which exclusions it wants to apply based on its own risk assessment and can deal with relevant (riskier) items under its usual national procedures potentially allowing for additional scrutiny.
Verification of entitlement
An aspect of the provisions that is likely to be particularly concerning for CFIs is the obligation to verify entitlement to relief. The CFI must get a declaration from the registered owner that they (i) are entitled to relief; (ii) are the beneficial owner of the payment (this is not defined under the directive and is to be determined in accordance with national law); (iii) have not engaged in relevant financial arrangements; and (iv) will inform the CFI of changes in circumstances.
The CFI must verify the information in the eTRC or equivalent and the declaration. In the market, there are concerns around how beneficial ownership will be verified, particularly given national differences in the interpretation of this concept. There is some assistance to be found in the fact that the CFI may rely on documentation and information that it already collects in the ordinary course of business (for instance through KYC checks) and the recitals specifically provide that CFIs “should not be required to perform further examinations or to request and collect further information from their customer”. However, ultimately, responsibility remains with the CFI and, under article 16, they can be held liable for all or part of the loss of any WHT arising from full or partial non-compliance. Concerningly, the recitals indicate that Member States can provide not only for joint and several liability for CFIs requesting relief, but also strict liability. How this will be reconciled with the purported limitations on their obligations remains to be seen.
Again, new processes will need to be established, new computerised templates to navigate, plus requirements to retain documentation and provide access. All in all, a potentially costly and burdensome exercise for CFIs. Will these costs ultimately end up being borne by investors through additional fees and indemnities?
Will FASTER achieve its objectives?
Ultimately it is clear that the final agreement is the result of compromise and negotiation. The desire to streamline WHT procedures has had to be balanced against the needs of those who are nervous about the systems being exploited in cases of tax fraud and abuse. For those Member States who have well-functioning national WHT relief procedures, it may seem like a lot of effort for not much reward. Whilst it could undoubtedly improve the current position in some Member States where WHT reclaims are locked indefinitely in national processes, some of the potential upsides of FASTER have been lost as it made its way through the European legislative process and it is not clear it will solve the issues currently plaguing the system around allocating beneficial ownership.
Not only will the new procedures not take effect until 2030, but many of the timescales have been lengthened. In addition to those mentioned above, relief only has to be granted within 60 days of the end of the period for requesting the refund (rather than 25 days). And Member States can, even under the streamlined procedures, still initiate a verification procedure or tax audit. The directive does provide a disincentive for Member States to delay matters unnecessarily, in the form of late payment interest still running in such cases. However, this has been limited to cases where national legislation includes late payment interest provisions, so for those Member States that have no such legislation, audits still could potentially run and run.
Although the Council acts as sole legislator and the European Parliament only has a consultative role, the Council’s press release indicates that the due to the changes the Council made in the Directive during the negotiations, the European Parliament will be consulted again on the agreed text. The directive will then need to be formally adopted by the Council. Member States will have to transpose the directive into national legislation by 31 December 2028, and the national rules will have to become applicable from 1 January 2030. There will be ongoing reviews (the first to be completed by 2032) by the Commission to evaluate whether the directive is reaching its objectives.
