European Commission Welcomes FASTER Withholding Tax Initiative to Boost International Investment and Fight Tax Fraud

In May, the European Commission confirmed its approval of the FASTER approach proposed by Belgium (which holds the EU Council presidency) for the Commission’s proposal to make withholding tax procedures in the EU more efficient and safer for Member States. This initiative moves the procedures for determining tax benefits from paper to the digital space and will contribute to transparency.

Key Concepts of the Initiative

Key steps proposed under the initiative are favorable to investors, financial intermediaries and national tax authorities and include:

◉ A common EU tax residence digital certificate speeds up tax exemption procedures. Investors with a diversified portfolio in the EU will only need one digital certificate of tax residence to receive multiple refunds in a single calendar year. A digital certificate of a tax resident must be issued within one working day after the request is submitted.

◉ Two accelerated procedures of “relief at source” and “quick refund” will make the refund process faster and more harmonized across the EU. Member States will be able to choose which one to use, including a combination of both.

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

‒ Under the “quick refund” procedure, the initial payment is made at the rate of tax withheld by the Member State where the dividend or interest is paid, but a refund of any excess tax paid is granted within 50 days of the date of payment.

These standardized procedures are expected to save investors around €5.17 billion per year.

◉ A standardized reporting obligation will provide national tax authorities with the necessary tools to verify entitlement to a reduced rate and detect possible abuses.

How Will the Reporting Process Work?

Authorized financial intermediaries will be required to report the payment of dividends or interest to the relevant tax authority so that it can trace the transaction back to the ultimate investor.

Large EU financial intermediaries must join the national register of authorized financial intermediaries. The register will also be available to non-EU and smaller EU intermediaries on a voluntary basis.

Financial intermediaries will request the taxpayer’s electronic tax residence or relevant proof of residence in a non-EU country and cross-check this information with their own records. They will also require proof that the taxpayer is the beneficial owner of liabilities and that they have not participated in any financial arrangement involving the payment of dividends or interest on the underlying liabilities.

Benefits for the Parties

Taxpayers who invest in the EU through authorized financial intermediaries will benefit from accelerated withholding procedures and avoid double taxation of dividend payments. Tax authorities will receive a complete picture of the financial chain and a convenient check method of the acceptability of the application of reduced rates.

Overview of the FASTER initiative