On May 14th, 2024, the ECOFIN council adopted a general approach to implement quicker and more secure processes for obtaining double taxation relief, with the final aim to enhance cross-border investments and combat tax fraud. 

The Belgian Minister of Finance sees this agreement as a key step to fight tax fraud more efficiently, improve the functioning of the capital markets union, and stimulate investments on European financial markets. 

Avoiding Double Taxation 

Generally, taxes are levied on dividends and interest from cross-border investments, while investors also face income taxes on the same earnings in their home countries. Despite double-tax treaties between countries intended to prevent double taxation, the reality is that the processes for claiming tax relief are often lengthy, expensive, and complex, leaving them susceptible to significant tax fraud.  

The new withholding tax initiative seeks to streamline and secure these procedures, making them quicker and less cumbersome for investors. 

Introduction of the eTRC 

The press release reiterates the importance of introducing a common EU digital tax residence certificate as a tool to streamline and digitalize the tax residency verification process. The eTRC will be used to access fast-track procedures for tax relief, supporting an automated process to issue these certificates quickly and efficiently. 

Fast-Track procedures 

As mentioned in the original proposal, member states will be allowed to complement their existing refund processes with two fast-track procedures: a “relief-at-source” and a “quick refund” procedure. 

Member states maintain the option to keep their current procedures on two conditions: 

• They provide relief from excess withholding tax on interest paid for publicly traded bonds; 

• They offer a comprehensive relief-at-source system, applicable to the excess on dividends paid for publicly traded shares issued by a resident in their jurisdiction and have a market capitalization ratio below 1.5%. If this ratio is exceeded for four consecutive years, the rules established by the Directive will be irreversibly applied, granting Member states a five-year period to incorporate the provisions of the Directive into their national legislation. 

Additional circumstances have been added in which Member states may not accept (to various extents) requests for fast-track withholding tax procedures to prevent fraud. 

New provisions for indirect investments 

Furthermore, the Council included clauses in the text concerning indirect investments, specifically for situations where investors don't directly invest in securities but do so through collective investment vehicles. These clauses guarantee that legitimate investors, like certain collective investment vehicles or their investors, can utilize expedited procedures. According to the updated regulations, certified financial intermediaries seeking relief for a registered owner must conduct thorough due diligence to verify the owner's eligibility for tax relief. 

Standardized reporting for financial intermediaries 

Introducing a standardized reporting obligation for financial intermediaries will facilitate the detection of potential tax fraud or abuse by national tax authorities. Member states will be required to establish national registers for large financial intermediaries. To streamline this registration process, the Council has approved the establishment of a European Certified Financial Intermediary Portal, which will act as a centrally dedicated website where all national registers will be accessible.  

Which intermediaries will be registered or removed from the national register will be at the discretion of Member states. Once registered, financial intermediaries must report to the appropriate tax authorities to enable transaction tracing. Member states will be able to request more extensive reporting to identify potential instances of tax fraud. 

The option of indirect reporting 

The Council has added the option of indirect reporting. That is, instead of reporting to the national tax authorities directly, certified financial intermediaries can provide the necessary information along the securities payment chain.  

Should member states fail to comply with the obligations stipulated in this directive, the Council will agree to enforce penalties against them. 

The next steps and entry into force 

The European Commission presented a proposal for the FASTER directive on June 19, 2023. This proposal is subject to a special legislative procedure, with the Council acting as the sole legislator, requiring unanimity within the Council. The European Parliament was consulted and provided its opinion on February 28, 2024. However, due to amendments made by the Council during negotiations, the European Parliament will undergo another consultation regarding the agreed text. 

Following this, the agreed text will undergo a legal and linguistic review, after which the directive must be formally adopted by the Council before publication in the EU’s Official Journal and subsequent entry into force. 

Member states are required to transpose the directive into national legislation by December 31, 2028, with national rules becoming applicable from January 1, 2030.