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. According to the International Monetary Fund, securities held by non-domestic investors in the European Union in 2019 were worth 10.7 trillion dollars. 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-borderinvestment within and into the EU. Currently, the withholding tax procedures applied in each Member State are very different. Investors have to deal with more than 450 different forms across the EU, most of which are only available in national languages. The Cum/Ex and Cum/Cum scandals have also shown how refund procedures can be abused: the tax losses from these practices have been estimated at € 150 billion for the years 2000-2020.
What has the Commission proposed?
Key actions proposed today will make life easier for investors, financial intermediaries and national tax authorities:
- A common EU digital tax residence certificate will make withholding tax relief procedures faster and more efficient. For example, investors with a diversified portfolio in the EU will need only one digital tax residence certificate to reclaim several refunds during the same calendar year. 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, which will make the relief process faster and more harmonised across the EU. Member States will be able to choose which one to use – including a combination of both.
- 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.
These standardised procedures are estimated to save investors around €5.17 billion per year.
- 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.
How will this benefit investors?
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.
How will this benefit national tax authorities?
European tax authorities lose significant amounts of money every year because of withholding tax abuse.
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.
Will this cause additional burdens for financial intermediaries?
The digitalisation of the tax residence certificate and the standardisation of the reporting obligations and of the refund requests would allow financial intermediaries to automate their processes, saving time and money. This would speed up the refund process as well as making withholding tax procedures more secure.
How will the Commission ensure that financial intermediaries have due diligence procedures in place?
According to the proposal, Member States will require the Certified Financial Intermediaries to have the adequate procedures in place to ensure taxpayers are eligible for the refunds. Certified Financial Intermediaries will collect the electronic tax residency certificate of the taxpayer, or the appropriate proof of residence in a non-EU country and verify this information against their own records. They will also need to collect a statement indicating that the taxpayer is the beneficial owner of the security and that they have not engaged in any financial arrangement that is linked to the dividend or interest payment on the underlying securities.
Once adopted by Member States, the proposal should come into force on 1 January 2027.