On 19 June 2023 the European Commission published a draft proposal for a faster and safer relief of excess withholding tax (the 'Proposal'). This new initiative aims to tackle the current particularly burdensome and lengthy withholding tax refund procedures for cross-border investors in the European Union (the 'EU').

General background

Generally EU Member States levy withholding taxes on payments made to non-resident investors which are typically more burdensome when compared to payments made to resident investors. To avoid double taxation, many EU Member States have entered in double tax treaties in order to share taxing rights between the source and the residence countries. Double tax treaties may entitle non-resident investors to a lower rate of withholding taxes or to an exemption of withholding tax in the source country. However, this may ultimately lead to a tax refund mechanism, of the withholding tax levied at source, which may be lengthy, costly and cumbersome and which may discourage cross-border investments within the EU.

The Proposal

The specific aim of the Proposal, which only applies to publicly traded shares and publicly traded bonds (and as such limited to specific dividend/interest cross-border payments), is to make withholding tax procedures more efficient and to provide EU Member States with the appropriate tools to combat tax abuse.

Key policy options are:

  • A common EU digital tax certificate with a common content and format issued and verified online by all EU Member States.
  • A national and public register of Certified Financial Intermediaries (CFI or CFIs) for the purpose of implementing an EU wide reporting standard. CFIs will have to report a well-defined set of information to the source EU Member State. The reporting would include information about the CFI itself, the final taxpayer receiving the dividend/interest payment, the payor of the dividend/interest payment and information regarding the payment and possible abusive schemes.
  • Two fast-track procedures which will make the relief process faster and more harmonized across the EU:
    • The 'relief-at-source' system which allows for reduced rates based on double tax treaties or domestic legislation to be applied directly at the moment of the dividend/interest payment. The 'quick refund' system which establishes a time frame within which the excess tax is refunded. CFIs maintaining an investment account of the registered owner may request a quick refund of the excess withholding tax on behalf of such registered owner within 25 calendar days from the date of payment of the dividend or interest. Interest will accrue, in favour of the investors, if the refund request has not been processed within 25 days.
  • CFIs may apply the 'relief-at-source' system or the 'quick refund' system if authorized by the registered owner to request relief on his behalf.

Safeguards against tax fraud and abuse

EU Member States require CFIs applying for relief-at-source and/or the quick refund system to have adequate due diligence procedures in place to ensure that the registered owner is eligible for the refund and accordingly must verify that he is the beneficial owner of the dividend/interest in accordance with national rules of the source EU Member State. In addition, CFIs are required to verify proof of residence with the electronic tax residency certificate and that registered owners have not engaged in a financial arrangement linked to the dividend or interest payment on the underlying securities.

Feedback and Entry into Force

The Proposal is open for feedback until 15 August 2023. If adopted, EU Member States will be obliged to transpose the proposed directive by 31 December 2026 and its provisions will enter into force on 1 January 2027.

Co-Author: Antonino Giusto

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.