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On May 14, 2024, the Council of the European Union (EU) reached a significant agreement on new rules for withholding tax procedures on Faster and Safer Relief of Excess Withholding Taxes (FASTER), aiming to streamline and secure procedures for obtaining double taxation relief. The FASTER initiative is designed to make withholding tax procedures in the EU more efficient and safer for cross-border investors, national tax authorities, and financial intermediaries such as banks and investment platforms. By introducing a common EU digital tax residence certificate, fast-track procedures, and standardized reporting obligations, the initiative addresses long-standing challenges in cross-border investments.
THIS ARTICLE IS WRITTEN BY KSENIIA SHAKHNAZAROVA ([email protected]) AND LETICIA DE MOURA ([email protected]). KSENIIA AND LETICIA ARE MEMBERS OF THE INTERNATIONAL TAX SERVICES TEAM OF RSM NETHERLANDS.
These measures are set to streamline administrative processes, reduce costs, and enhance security for all stakeholders involved. As a result, the FASTER initiative is expected to boost cross-border investments and combat tax abuse effectively, marking a new era in cross-border investments. This initiative is beneficial not only for EU-based investors and financial intermediaries but also holds positive implications for international investors, including those from the U.S. In this article, we delve into the background and challenges that paved the way for the FASTER initiative, the proposed solutions, the benefits of the directive, and its impacts from a U.S. perspective.
Current Challenges
At present, numerous Member States impose withholding taxes on dividends from equity holdings and interest from bond holdings paid to foreign investors. These investors are also subject to income tax in their home country on the same income. According to the International Monetary Fund, securities held by non-domestic investors in the EU were worth $10.7 trillion in 2019. To mitigate double taxation, many countries have signed double tax treaties, which entitle non-resident investors to lower withholding tax rates or exemptions in the levying country.
The current refund procedures for reclaiming these taxes are often protracted, costly, and complex, leading to frustration among investors and deterring cross-border investment within the EU. Investors must navigate over 450 different forms across the EU, most of which are available only in national languages. Moreover, high-profile tax abuse scandals, such as the Cum/Ex and Cum/Cum schemes , have highlighted vulnerabilities in the existing refund procedures, with estimated tax losses of €150 billion from 2000 to 2020.
FASTER Initiative: Enhancing withholding tax procedures
The FASTER initiative is introducing several significant measures to streamline and speed up the withholding tax procedures. These include the introduction of a common EU digital tax residence certificate, which will hasten and simplify withholding tax relief procedures. Investors will only need a single digital certificate to claim multiple refunds within the same calendar year. This certificate is expected to be issued within one working day of the request, replacing the current paper-based processes.
In addition, two new fast-track procedures will supplement the existing standard refund process. The first, Relief at Source, will apply the tax rate at the time of dividend or interest payment that reflects the applicable double taxation treaty provisions. The second, Quick Refund, will consider the withholding tax rate of the Member State where the income is paid, with refunds for any overpaid taxes granted within 50 days from the payment date. These standardized procedures are expected to save investors approximately €5.17 billion annually.
Furthermore, financial intermediaries will be required to report dividend or interest payments to the relevant tax authorities, which will allow for better tracking and prevention of tax abuse. Certified financial intermediaries will need to join a national register, which will also be open to non-EU and smaller EU intermediaries on a voluntary basis. This registration will enable fast-track withholding tax procedures and ensure compliance with tax regulations.
In summary, the updated withholding tax structure aims to expedite processes for investors, protect their entitled tax rights, and prevent double taxation.The FASTER initiative brings a host of advantages. It enhances efficiency by introducing digital tax residence certificates that simplify the refund process, enabling investors to claim multiple refunds with one certificate and thus reducing administrative burdens. The initiative also promotes harmonization by implementing fast-track procedures that standardize withholding tax processes across the EU, simplifying the navigation of different Member States' tax systems for investors. In terms of cost savings, the initiative's standardized and automated processes save both time and money for investors and financial intermediaries alike. Lastly, the initiative bolsters security through enhanced reporting obligations, which give tax authorities complete visibility of financial transactions, aiding in the detection and prevention of tax abuse.
U.S. Perspective
FASTER Directive is also beneficial for U.S. investors. The same framework that is applicable to the EU, may be applied the U.S. investors. The Directive eliminates fragmented and inconsistent approaches to preventing double taxation for withholding taxes within the EU. The robust framework provided by the FASTER Directive builds trust between U.S. investors and EU tax authorities, fostering a cooperative relationship that benefits both parties.
Forward Thinking
FASTER Directive is expected to be milestone in the investment field not only in the European market but also for the U.S. and other non-EU jurisdictions.
The FASTER Directive represents a significant step towards streamlining the process for reclaiming excess withholding taxes on cross-border investments in the EU. For both European and U.S. investors, the directive holds promise for improving efficiency and reducing administrative burdens for investors, while also posing certain challenges and opportunities. As the directive is implemented, U.S. investors and financial institutions will need to navigate the new landscape carefully, leveraging the benefits while ensuring compliance with both EU and U.S. regulations.
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