EU Proposes Rules to Standardize the Application of Withholding Tax

On June 19, the European Commission proposed new rules to make withholding tax procedures in the EU more efficient and safer for investors, financial intermediaries (such as banks) and tax authorities of its Member States. This initiative is part of the Communication on Business Taxation for the 21st Century and the Commission’s Action Plan on the Capital Markets Union for 2020; it will contribute to fair taxation, tax fraud combating and more convenient investing.

Withholding tax is payable by an investor who is a resident in one EU Member State and must pay tax on interest or dividends received in another Member State. Following the agreements on the elimination of double taxation, such an investor has the right to request a refund of any excess tax paid in another Member State.

The main steps proposed by the Commission to facilitate such procedures for investors are as follows:

1. Single EU tax resident digital certificate. Investors with a diversified portfolio in the EU will only need one digital tax residency certificate to receive multiple refunds throughout a single calendar year.

2. In addition to the certificate, two accompanying mechanisms are offered: the “relief at source” procedure and the “quick refund” system.

Under the “relief at source” procedure, the assessment of the tax rate at the time of payment of dividends or interest is based on the application of the provisions of the double taxation agreement.

Under the “quick refund” procedure, the initial payment is made based on the relevant tax rates adopted by the Member State where the dividend or interest is paid, but a refund of any excess tax shall be granted within 50 days of the date of payment.

3. Standardized reporting provides national tax administrations with the necessary tools to verify the right to apply a reduced rate and identify possible tax abuse. Certified financial intermediaries shall report the payment of dividends or interest to the relevant tax authority so that it may trace the transaction.

At the same time, large financial intermediaries in the EU must be added to the national register of certified financial intermediaries. This register will also be open to non-EU financial intermediaries and smaller EU-based financial intermediaries on a voluntary basis.

The proposal, when approved by Member States, will enter into force on January 1, 2027.

Press release of the European Commission