On 10 December 2024, the European Council adopted the new FASTER Directive aligning the withholding tax relief and refund procedures of all 27 EU member states (for prior coverage, see the article in the May 2024 issue of Corporate Tax News). The directive, published in the EU official journal on 10 January 2025, is designed to simplify the withholding tax procedures for dividends and interest paid on publicly traded instruments to investors in other EU member states.
Currently, withholding tax procedures in each EU member state are different. Cross-border investors with activities in different EU member states encounter lengthy, costly and cumbersome procedures to recover withholding taxes levied on dividends from publicly traded shares and interest from publicly traded bonds. The FASTER Directive introduces three measures to make the relief and/or refund of excess withholding taxes more efficient: a common tax residence certificate, fast-track procedures and reporting obligations.
The FASTER Directive introduces a common digital tax residence certificate (eTRC) that tax-paying cross-border investors will be able to use to benefit from the fast-track procedures to obtain relief from and/or a refund of withholding taxes; and only one eTRC will be required to claim multiple refunds during the same calendar year. EU member states will provide an automated process to issue the eTRC. The eTRC will be available for individuals and entities deemed resident in an EU member state that will need to be issued within 14 calendar days from the date of the request and will cover up to one fiscal year. Member states will need to recognise an eTRC issued by another member state as adequate proof of a cross-border investor’s residence in that other member state.
The FASTER Directive introduces two fast-track procedures to standardise withholding tax relief within the EU that will complement the existing standard refund procedure in EU member states. Member states will be able to choose between the two procedures:
EU member states will be required to apply the fast-track procedures if they provide relief from excess withholding tax on dividends paid for publicly traded shares issued by an entity that is resident for tax purposes in their jurisdiction. However, member states will be exempt from applying the procedure and from maintaining a national registry and CFI reporting if they: (i) provide a comprehensive relief-at-source system applicable to the excess withholding tax on dividends paid for publicly traded shares issued by a resident in their jurisdiction and interest paid for publicly traded bonds; and (ii) their market capitalisation ratio for at least the last four consecutive years has been below the threshold of 1.5% of the overall EU market capitalisation, as reported by the European Securities and Markets Authority.
EU member states will be allowed to exclude, in whole or in part, requests for withholding tax relief from the fast-track procedures in order to carry out further checks with a view to preventing fraud. Whether a request for withholding tax relief should be excluded from the fast-track procedures depends on the decision of the relevant source country. If this is the case, the source country will have to ensure that the cross-border investor has access to the national standard refund system. Circumstances that may lead to the denial of a request for withholding tax relief under the fast-track procedures includes: (i) dividends paid on publicly traded shares acquired within five days before the ex-dividend date; (ii) financial arrangements related to dividends not settled before the ex-dividend date; (iii) claims for reduced withholding rates not based on a tax treaty; and, (iv) dividend payments exceeding EUR 100,000 per investor per payment date, except for large regulated collective investment undertakings and certain pension fund.
If there is a risk of fraud or abuse, the source country will have to investigate the case before processing a refund. Member states should create lists of cases where the request for relief has been denied or where further checks were conducted.
The FASTER Directive establishes a standardised reporting obligation for CFIs, designed to make it easier for EU tax authorities to detect potential tax fraud or abuse. CFIs will need to submit transaction information to the tax authorities of the source country so that the relevant cross-border investors can be properly traced (i.e., direct reporting). The direct reporting is to be carried out by the closest CFI to the investor. In the case of securities payments, each of the CFIs along the securities payment chain will need to report the information on the transaction (i.e., indirect reporting).
Information to be submitted by CFIs includes the cross-border investor’s eTRC, a declaration that the investor is entitled to the relief and, if required by the source country, that it is the beneficial owner based on national legislation or an applicable tax treaty. CFIs will also be required to verify the applicable withholding tax rate and that the information to be submitted to the source country tax authorities is consistent with the information obtained through the normal course of business (e.g., information obtained for “know-your-customer” purposes). This due diligence will have to be carried out annually unless the CFI knows or should know there has been a change of circumstances or that the information is incorrect or unreliable. CFIs will have to maintain the supporting documentation of the reported information for 10 years.
The deadline for the reporting obligation is the end of the second month following the month of the payment date. To ensure that CFIs comply with their reporting obligations, member states can introduce rules that will hold the CFI liable in whole or in part for the loss of withholding tax revenue incurred due to noncompliance with the FASTER Directive. The directive does not specify the type or severity of the penalties but they must be effective, proportionate and dissuasive.
EU member states must transpose the FASTER Directive into their national legislation by 31 December 2028, with the national legislation applying as from 1 January 2030 (although they may implement the directive sooner). The European Commission is expected to work on various implementing acts and guidance to further clarify terms and requirements and provide a standardised common template for the eTRC and the statement to be obtained from cross-border investors and reporting forms.
The FASTER Directive will benefit both cross-border investors and EU member states. Cross-border investors will be subject to standardised and automated expedited procedures facilitating relief from and/or a refund of excess withholding taxes across the EU and avoiding double taxation. Member state tax authorities will have new tools at their disposal to combat tax fraud and abuse, including financial chain visibility due to the new CFI reporting obligations. Nevertheless, the directive will impose a considerable burden on CFIs, which will need to comply with new reporting and due diligence obligations and can be held accountable for the loss of withholding tax revenue. Financial intermediaries should monitor further developments relating to the FASTER Directive—including any early implementation by member states—and consider taking steps now to verify whether they fall within the scope of the directive and, if so, start preparing their internal systems to be ready for the reporting and due diligence obligations.
Frederik Boulogne
Nathalie Bravo
BDO in Netherlands
Currently, withholding tax procedures in each EU member state are different. Cross-border investors with activities in different EU member states encounter lengthy, costly and cumbersome procedures to recover withholding taxes levied on dividends from publicly traded shares and interest from publicly traded bonds. The FASTER Directive introduces three measures to make the relief and/or refund of excess withholding taxes more efficient: a common tax residence certificate, fast-track procedures and reporting obligations.
Common Tax Residence Certificate
The FASTER Directive introduces a common digital tax residence certificate (eTRC) that tax-paying cross-border investors will be able to use to benefit from the fast-track procedures to obtain relief from and/or a refund of withholding taxes; and only one eTRC will be required to claim multiple refunds during the same calendar year. EU member states will provide an automated process to issue the eTRC. The eTRC will be available for individuals and entities deemed resident in an EU member state that will need to be issued within 14 calendar days from the date of the request and will cover up to one fiscal year. Member states will need to recognise an eTRC issued by another member state as adequate proof of a cross-border investor’s residence in that other member state.
Fast-Track Procedures
The FASTER Directive introduces two fast-track procedures to standardise withholding tax relief within the EU that will complement the existing standard refund procedure in EU member states. Member states will be able to choose between the two procedures:
- Relief-at-source where the relevant tax rate based on an applicable tax treaty is applied at the time the dividends or interest are paid; and
- Quick refund procedure where the reimbursement of excess withholding tax will be granted within 60 days upon receipt of the refund request.
EU member states will be required to apply the fast-track procedures if they provide relief from excess withholding tax on dividends paid for publicly traded shares issued by an entity that is resident for tax purposes in their jurisdiction. However, member states will be exempt from applying the procedure and from maintaining a national registry and CFI reporting if they: (i) provide a comprehensive relief-at-source system applicable to the excess withholding tax on dividends paid for publicly traded shares issued by a resident in their jurisdiction and interest paid for publicly traded bonds; and (ii) their market capitalisation ratio for at least the last four consecutive years has been below the threshold of 1.5% of the overall EU market capitalisation, as reported by the European Securities and Markets Authority.
EU member states will be allowed to exclude, in whole or in part, requests for withholding tax relief from the fast-track procedures in order to carry out further checks with a view to preventing fraud. Whether a request for withholding tax relief should be excluded from the fast-track procedures depends on the decision of the relevant source country. If this is the case, the source country will have to ensure that the cross-border investor has access to the national standard refund system. Circumstances that may lead to the denial of a request for withholding tax relief under the fast-track procedures includes: (i) dividends paid on publicly traded shares acquired within five days before the ex-dividend date; (ii) financial arrangements related to dividends not settled before the ex-dividend date; (iii) claims for reduced withholding rates not based on a tax treaty; and, (iv) dividend payments exceeding EUR 100,000 per investor per payment date, except for large regulated collective investment undertakings and certain pension fund.
If there is a risk of fraud or abuse, the source country will have to investigate the case before processing a refund. Member states should create lists of cases where the request for relief has been denied or where further checks were conducted.
Standardised Reporting for Financial Intermediaries
The FASTER Directive establishes a standardised reporting obligation for CFIs, designed to make it easier for EU tax authorities to detect potential tax fraud or abuse. CFIs will need to submit transaction information to the tax authorities of the source country so that the relevant cross-border investors can be properly traced (i.e., direct reporting). The direct reporting is to be carried out by the closest CFI to the investor. In the case of securities payments, each of the CFIs along the securities payment chain will need to report the information on the transaction (i.e., indirect reporting).Information to be submitted by CFIs includes the cross-border investor’s eTRC, a declaration that the investor is entitled to the relief and, if required by the source country, that it is the beneficial owner based on national legislation or an applicable tax treaty. CFIs will also be required to verify the applicable withholding tax rate and that the information to be submitted to the source country tax authorities is consistent with the information obtained through the normal course of business (e.g., information obtained for “know-your-customer” purposes). This due diligence will have to be carried out annually unless the CFI knows or should know there has been a change of circumstances or that the information is incorrect or unreliable. CFIs will have to maintain the supporting documentation of the reported information for 10 years.
The deadline for the reporting obligation is the end of the second month following the month of the payment date. To ensure that CFIs comply with their reporting obligations, member states can introduce rules that will hold the CFI liable in whole or in part for the loss of withholding tax revenue incurred due to noncompliance with the FASTER Directive. The directive does not specify the type or severity of the penalties but they must be effective, proportionate and dissuasive.
Next Steps
EU member states must transpose the FASTER Directive into their national legislation by 31 December 2028, with the national legislation applying as from 1 January 2030 (although they may implement the directive sooner). The European Commission is expected to work on various implementing acts and guidance to further clarify terms and requirements and provide a standardised common template for the eTRC and the statement to be obtained from cross-border investors and reporting forms.
BDO Insight
The FASTER Directive will benefit both cross-border investors and EU member states. Cross-border investors will be subject to standardised and automated expedited procedures facilitating relief from and/or a refund of excess withholding taxes across the EU and avoiding double taxation. Member state tax authorities will have new tools at their disposal to combat tax fraud and abuse, including financial chain visibility due to the new CFI reporting obligations. Nevertheless, the directive will impose a considerable burden on CFIs, which will need to comply with new reporting and due diligence obligations and can be held accountable for the loss of withholding tax revenue. Financial intermediaries should monitor further developments relating to the FASTER Directive—including any early implementation by member states—and consider taking steps now to verify whether they fall within the scope of the directive and, if so, start preparing their internal systems to be ready for the reporting and due diligence obligations. Frederik Boulogne
Nathalie Bravo
BDO in Netherlands