What the ‘FASTER’ tax reforms could mean for EU investors

EU law makers hope the proposed directive on faster and safer relief of excess withholding taxes (FASTER) directive will make it easier for cross-border investors to claim relief from dividends and interests paid to them – and in doing so, avoid the potential for double taxation on those funds.

The current withholding tax systems in respect of dividends and interests on publicly traded instruments within the EU is fragmented, but the Council of Ministers’ agreement on the FASTER initiative means the prospect of a more efficient, secure and simplified system for investors, financial intermediaries and tax authorities alike has moved closer. Here, we look at features of the FASTER proposals and their potential impact on cross-border investment within the EU.

EU digital tax residence certificate

A common EU digital tax residence certificate, the eTRC, would be introduced, under the proposed new directive. Investors would be able to use the eTRC, which would remain valid for no more than one year, to benefit from the fast-track procedures provided for in the directive, which aim to ensure access to withholding tax relief is facilitated in a simpler, faster and more efficient way than is the case under the current paper-based systems of many member states. The certificates will be particularly beneficial to investors with a diversified portfolio across the EU.

Under the proposed directive, EU member states would need to issue the eTRC under the automated process within 14 days of the request. This is longer than previously envisaged – the European Commission had originally proposed one day after the request – but this will still be a substantial improvement on the delays often experienced by investors in some member states up to this point.

Fast-track procedures

Two fast-track procedures are provided for under the proposed directive and are designed to make withholding tax relief processes across the EU faster, simpler and more harmonised. Each EU member state will, if the proposals are confirmed in EU law, be required to implement one of the two procedures, or a combination of both, subject to an exception described below.

The first procedure is based on a “relief at source” model, which will involve applying withholding tax at the lower rate at the time of payment. The alternative procedure would involve withholding tax being applied as normal followed by a “quick refund” of any overpaid tax based on strict timelines.

It has been estimated that the fast-track procedures would result in savings to cross-border investors exceeding €5 billion per year.

Not all member states will be required to implement this measure. This requirement will not apply where a member state has a comprehensive relief at source system in place already as well as a market capitalisation ratio of 1.5% or more for four consecutive years. While this exclusion does detract from the intended harmonisation of withholding tax systems, it should be broadly welcomed as reflecting the need for proportionality.

Another positive element of the proposed directive is the inclusion of criteria for a member state’s system to be considered comprehensive in nature, including that it provides access to relief to any natural person or entity that is entitled to a relief in accordance with that member state’s domestic law or pursuant to a double tax treaty, which should assist in mitigating the risk of disputes arising between the EU and individual member states in the future. This had not been initially proposed by the Commission, and the criteria should act as a clear signpost for member states who already have a robust relief at source system in place and want to maintain this system rather than implementing the above fast-track procedures.

Role of certified financial intermediaries

Before investors would be able to benefit from the fast-track procedures, they would need to engage with certified financial intermediaries (CFIs), such as large institutions handling payments of dividends and central securities depositaries acting as withholding tax agents for such payments, to assist with the process.

The proposed directive provides for the creation of national registers for CFIs to support the certification process. Other, smaller entities acting as CFIs, would be entitled to register voluntarily. The EU would be tasked with developing a portal to act as a single entry point.

Once the FASTER directive is in effect, CFIs will play a pivotal role in the operation of the fast-track procedures. New and demanding compliance obligations would arise, however. These include implementation of due diligence procedures, such as assessing eligibility for tax relief, verifying beneficial ownership, and reporting standardised information to national tax authorities. These obligations, and the potential liability for CFIs for failure to comply with them, could impact the overall success of the FASTER initiative and the goals which the EU has sought to achieve through it.

Implementation and associated challenges

The proposed directive is expected to be formally adopted by the Council of Ministers in early 2025 after the European Parliament has provided its opinion on the latest text.

Member states would then need to transpose the directive into their domestic law by the end of 2028, with the rules having effect from 1 January 2030.

The manner in which the FASTER directive is implemented in the EU member states will be crucial to achieving the expectations and aims of this initiative. For example, the effort to harmonise will be negatively impacted where a member state seeks to impose more stringent requirements than those outlined in the directive as part of its preferred fast-track procedure.

Beyond the intricacies arising as part of the domestic transposition by the member states, perhaps the biggest challenge for investors will be adapting to the new processes implemented as a result of the directive. Whilst some investors are expected to make savings – principally, those who currently suffer withholding tax on their foreign investments but have no scope to recover same – it is also inevitable that increased costs will arise as part of this exercise, including for investors who do not necessarily stand to make any savings. This will likely be driven in large part by the new and burdensome demands placed on CFIs. For a lot of investors, this may represent a small price to pay for the better functioning of capital markets.

A version of this article was first published by Bloomberg Tax.