On 19 June 23, the European Commission released its proposal for an EU Directive for an EU wide withholding tax system.

The proposal is structured in two building blocks which are covered in chapters 2 and 3, respectively. Chapter 2 provides for the creation of an EU-wide digital tax residence certificate, whilst Chapter 3 deals with the WHT relief procedures. It includes the procedure to establish National Registers for specific financial intermediaries (Certified Financial Intermediary – CFI), standardised reporting obligation for such CFI, and the obligation for Member States to set up a relief at source system or a quick refund system or a combination of both to ensure swift and secure relief from WHT, based on DTT or domestic rules, for EU and non-EU investors, when certain transparency conditions are met.

Common digital tax residence certificate (eTRC)

The eTRC is to be introduced by all Member States and will provide a fast, easy and secure administrative process to confirm EU taxpayers’ tax residency. As laid down in article 4 there will be a common content for the eTRC, regardless of the issuing Member State. The elements established in paragraph 2 as common content for the eTRC are those identifying the requesting taxpayer and confirming that they are resident in the Member States according to its national rules. Targeted consultations with Member States revealed that in terms of establishing investor residency, the same rules apply to deem the investor resident or not in a given Member State, regardless of the country of investment. Therefore, the Member State of the investment does not need to be mentioned in the eTRC.

It is proposed that the eTRC covers at least the full calendar year in which it is requested. The minimum covered period of the eTRC (one calendar year) should not be interpreted as preventing Member States from issuing eTRC with a longer covered period, depending on the concept of tax residence and internal decision of each Member State. Member States will be required to issue an eTRC within one day, as long as they have been provided with a specific set of information and provided that no exceptional circumstances occur justifying a delay. To meet the requirement of one-day issuance, a fully automated system to issue the eTRC should be implemented by Member States, which allows for requests via an online portal accessible to the taxpayer and parties authorised thereby. The eTRC will be secured using an electronic seal in conformity with Regulation (EU) No 910/2014 of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market (the eIDAS Regulation)

Member States’ National Registers

In order to benefit from the WHT relief procedures at the core of the Directive, investors will need to be able to engage with financial intermediaries that are certified to provide those services. There are two grounds for being certified as a Certified Financial Intermediary (CFI) and thus accessing the procedures of this Directive:

– On a compulsory basis: for (1) large institutions and (2) Central Securities Depositories that are providing withholding tax agent services and that as such need to register with those Member States in which securities’ issuers are located and where any of their clients have invested in.

– On a voluntary basis: for all other entities (including those that are established in a third country jurisdiction) acting as financial intermediaries and meeting specific requirements by registering in one or several of the National Registers set up in accordance with this Directive, at the discretion of the concerned intermediary; it is expected that registration should be with those Member States where their clients have investments in.

Common reporting

This Directive aims to help in the fight against tax fraud and abuse in the field of excess WHT relief procedures and to make these procedures effective. Introducing transparency in the financial chain serves these two objectives since it enables the source Member State to receive the information needed to check that the correct WHT rate applies and to assess if anti-abuse rules needs to be applied.

Who has to report and to whom?

The reporting obligations derive from the registration in one of the National Registers. All CFIs included in one or more of the National Registers are subject to reporting to the authority maintaining the register, and where applicable to the withholding tax agent, regardless of their country of residence (EU or outside the EU; or in a Member State with or without an own National Register in place). CFIs registered in any National Register need to report where their clients’ investment takes place in a Member State that has a National Register.

What has to be reported?

The Directive lays down a common set of reporting elements in Annex II. Each CFI shall report only on the part of the transaction that is visible for it, i.e., from whom it is receiving the dividend/interest and to whom it is paying the dividend/interest. The information reported to the tax administration will enable it to ascertain the identity of the final investor and his/her potential entitlement to the reduced WHT rate.

Heading E of Annex II provides for two reporting requirements that are aimed at helping to combat WHT abuse, mainly Cum/Cum abuse schemes,

(i) information about the holding period of underlying securities and

(ii) information about financial arrangements linked to the securities for which the taxpayer is requesting relief.

The first element seeks information on whether the underlying securities have been bought within 2 days before the ex-dividend date, with the objective of helping prevent further fraudulent/abusive schemes for multiple reclaim of the same WHT when only one single reclaim should apply (Cum/Ex schemes). The second element seeks information on whether the reporting financial intermediary is aware of any financial arrangement involving the underlying securities such as a repurchase agreement (repo) or securities lending but also derivatives products such as single stock futures. As the above schemes have been observed only in relation to dividend payments, the reporting elements under Heading E are not required in relation to interest paid on bonds. The same approach is followed with regard to very low amounts of dividends paid, which are considered to be low-risk cases that cannot justify the relevant reporting burden on CFIs.

How will the reporting take place?

The reporting will take place via a standardised XML format scheme that will be set out in an implementing act to be adopted by the Commission. The automated channel to deliver the information from the economic operators to the corresponding tax administration or WHT agent acting on its behalf will be standardised and set out in this implementing act.

When is the reporting obligation arising?

The timeline to report the information comprised in Annex II is 25 days at the latest from the record date. In Member States where relief at source will apply and the dividend payment date is earlier than 25 days from record date, the financial intermediaries should have a mechanism in place to timely provide information to the WHT agent on the rate to be applied.

Systems of relief

The proposal provides:

(a) a relief at source system; and

(b) a quick refund system.

Under a relief at source system, the correct amount of taxes is applied by the WHT agent at the time of the dividend/interest payment (article 12). Under a quick refund system, the tax is withheld at the higher rate applied in the source country but the excess tax is then given back within a set time frame of maximum 25 days from the date of the request or from the date when the required reporting is fulfilled, whichever the latest. This should take place within 50 calendar days from payment date

Each Member State that applies relief procedures for excess withholding tax may decide to apply the relief at source or quick refund system or both as well as whether or not to use the above outsourcing possibility. Within these two systems Member States have the discretion, for instance, to only allow low risk taxpayers to request relief at source whilst other taxpayers can only request a quick refund.

Where the relief at source and quick refund systems set out in this Directive do not apply, a standard refund procedure will be applied, where the taxpayer or its appointed representative, which does not necessarily have to be a financial institution, are able to directly request a refund to the tax authority. This Directive also ensures that at least the content of the information to be reported to the tax authority will cover the information envisaged under heading E of Annex II.

Next steps and entry into force

This proposal, once adopted unanimously by all Member States, should be transposed into Member States’ national law by 31 December 2026. It should come into effect as of two years after the implementing acts have been adopted, which is expected to be by 1 January 2027.

Links to the various document of the Proposal can be found by clicking here.