The European Commission (EC) has proposed new rules to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries (e.g. banks) and Member State tax administrations.
Currently, in case of cross-border investments, many Member States levy withholding taxes on dividends on holdings of equities and on the interest on holdings of bonds paid to investors who live abroad. However, investors also have to pay income tax in their country of residence on the same income. To avoid double taxation, many countries have agreed to share taxing rights between the source and the residence countries by signing double tax treaties. These treaties may entitle non-resident investors to a lower rate of withholding taxes or to an exemption in the country they are levied. The problem is that these refund procedures are often lengthy, costly and cumbersome, causing frustration for investors and discouraging cross-border investment within and into the EU. Currently, the withholding tax procedures applied in each Member State are very different.
The EC has proposed the following:
- A common EU digital tax residence certificate will make withholding tax relief procedures faster and more efficient. The digital tax residence certificate should be issued within one working day after the submission of a request. At present, most Member States still rely on paper-based procedures.
- Two fast-track procedures complementing the existing standard refund procedure: a “relief at source” procedure and a “quick refund” system.
- Under the “relief at source” procedure, the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules of the double taxation treaty provisions.
- Under the “quick refund” procedure, the initial payment is made taking into account the withholding tax rate of the Member State where the dividends or interest is paid, but the refund for any overpaid taxes is granted within 50 days from the date of payment.
- A standardised reporting obligation will provide national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse. Certified financial intermediaries will have to report the payment of dividends or interest to the relevant tax administration so that the latter can trace the transaction. In particular, large EU financial intermediaries will be required to join a national register of certified financial intermediaries. This register will also be open to non-EU and smaller EU financial intermediaries on a voluntary basis. Taxpayers investing in the EU through certified financial intermediaries will benefit from fast-track withholding tax procedures and avoid double taxation on dividend payments. The more financial intermediaries register, the easier it will be for tax authorities to process refund requests, regardless of the procedure used.
The new residence certificate will allow investors to submit their withholding tax refund request digitally, making the reclaim process faster and smoother. Only one digital tax residence certificate will be needed to reclaim several refunds during a calendar year, avoiding the issuance of multiple certificates of residence in case of an investor with a diversified portfolio in the EU. Overall, the new withholding tax framework will grant investors access to fast-track procedures, ensuring the tax rights they are entitled to and avoiding double taxation.
The new reporting obligations will mean that tax authorities have full visibility of the financial chain to check that investors are eligible for reduced rates and to ensure that a withholding tax refund is correctly granted, therefore fighting tax abuse.
Once adopted by Member States, the proposal should come into force on 1 January 2027.
