BackEurope seeks to implement safer and more efficient withholding tax procedures for cross-border investors. The European Council has just approved the Faster Directive, a new regulation that will change the taxation of dividends (on securities and shares) and interest (on bonds) paid to investors in the European Union. “Harmonizing our tax mitigation procedures is essential if we want to improve the functioning of the market union,” says Belgian Finance Minister Alexander De Croo.
The rule is intended to solve the problem of cross-border investments. Currently, many European countries tax dividends and interest paid to investors residing abroad. At the same time, these investors must pay income tax in their country of residence on the same income.
Although treaties between member states seek to resolve the double taxation problem, the procedures for applying for withholding tax mitigation vary considerably between member states, resulting in lengthy and costly processes. The change in the rules aims to make tax mitigation procedures faster, simpler and, at the same time, more secure, according to the European Council.
How will it be implemented from now on? The directive will introduce an EU common digital certificate of tax residence (CDRF) that taxpaying investors will be able to use to benefit from the accelerated procedures to obtain withholding tax mitigation.
Member states will establish an automated process for issuing digital certificates of tax residence to individuals or entities deemed to be resident in their territory for tax purposes.
The directive allows Member States to have two accelerated procedures that complement the current ordinary withholding tax refund procedure. This will make the mitigation and refund processes faster and more harmonized across the EU.
The European Council has agreed that Member States should apply the accelerated procedures if they grant relief from withholding tax levied in excess on dividends paid on listed shares.
The negotiators have also introduced into the text additional circumstances in which Member States may exclude, in whole or in part and for the purpose of further controls, requests for mitigation of withholding tax from accelerated procedures, with the aim of preventing fraud.
The European Council has added provisions relating to indirect investments for cases where the investor does not invest directly in securities but through a collective investment undertaking. These provisions ensure that legitimate investors, such as certain collective investment schemes or their investors, have access to the accelerated procedures.
Under the new rules, certified financial intermediaries applying for mitigation on behalf of a formal holder will have to perform due diligence as to the eligibility of the formal holder to benefit from tax mitigation.
In addition, the directive will establish a standardized reporting obligation for financial intermediaries, such as banks or investment platforms. Member States will establish national registers in which large, and optionally small, financial intermediaries will have to register in order to be certified. To simplify this registration procedure, the European Council has agreed to create the European Portal for Certified Financial Intermediaries.
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