The European Commission has unveiled a set of proposed rules aimed at enhancing the efficiency and security of withholding tax procedures within the European Union (EU). These measures, which form a crucial part of the Communication on Business Taxation for the 21st Century and the Commission’s 2020 Action Plan on the Capital Markets Union, seek to promote fairer taxation, combat tax fraud, and facilitate cross-border investment across the EU.
Withholding tax refers to the obligation of an investor residing in one EU Member State to pay taxes on interest or dividends earned in another Member State. This frequently applies to cross-border investors. To prevent double taxation, many EU Member States have established double taxation treaties, which prevent individuals or companies from being taxed twice. These treaties allow cross-border investors to claim a refund for any excess taxes paid in another Member State.
However, the current refund procedures are often protracted, costly, and cumbersome, leading to frustration among investors and discouraging cross-border investments within and into the EU. Each Member State has its own distinct withholding tax procedures, resulting in over 450 different forms across the EU, most of which are exclusively available in national languages. Additionally, recent scandals such as Cum/Ex and Cum/Cum have revealed the potential for abuse in refund procedures, with estimated tax losses of €150 billion between 2000 and 2020.
The key actions proposed by the European Commission aim to simplify the process for investors, financial intermediaries, and national tax authorities:
- Introduction of a common EU digital tax residence certificate: This certificate will expedite withholding tax relief procedures, enabling investors with diversified portfolios in the EU to utilize a single digital tax residence certificate for multiple refund claims within the same calendar year. Member States will be required to issue the digital certificate within one working day of the request, replacing the current paper-based procedures.
- Implementation of two fast-track procedures alongside the existing standard refund procedure: Member States will have the flexibility to choose between a “relief at source” procedure and a “quick refund” system, or a combination of both. These procedures will expedite and harmonize the relief process across the EU. Under the relief at source procedure, the tax rate will be determined based on the applicable rules of the double taxation treaty provisions at the time of dividend or interest payment. The quick refund procedure will ensure that any overpaid taxes are reimbursed within 50 days from the payment date.
These standardized procedures are estimated to save investors approximately €5.17 billion annually.
- Introduction of a standardized reporting obligation: National tax administrations will have access to the necessary tools to verify eligibility for reduced rates and detect potential abuse. Certified financial intermediaries will be required to report dividend or interest payments to the relevant tax administration, enabling effective transaction tracing. Large EU financial intermediaries will be mandated to join a national register of certified financial intermediaries, with voluntary participation open to non-EU and smaller EU financial intermediaries. Taxpayers investing in the EU through certified financial intermediaries will benefit from expedited withholding tax procedures, minimizing the risk of double taxation on dividend payments. The registration of more financial intermediaries will streamline the refund request processing for tax authorities, irrespective of the chosen procedure.
These new measures are poised to promote fairer and simpler taxation, facilitate cross-border investment, and enhance the EU’s ability to combat tax abuse. It is estimated that the standardized procedures will result in annual savings of €5.17 billion for investors.
For further information on these proposed measures and their implications, please refer to the European Commission’s official communication.
https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3301