European Commission announces plans for EU-wide system for withholding tax relief at source

JULY 24, 2020 | TAX NEWS

On July 15th, 2020, the European Commission (“EC”) issued a communication to the European Parliament and Council. It contains an action plan for “fair and simple taxation supporting the recovery strategy”. The term recovery, in this context, means recovery of the European economy from the fallout of the COVID-19 crisis. The plan contains 25 actions. Action 8 (page 10 of the document) unfolds the EC’s ambition to propose, in 2022/2023, a legislative initiative for introducing a “common, standardized, EU-wide system for withholding tax relief at source”. Options considered will include legislative and non-legislative interventions and will take in to account the OECD TRACE initiative.

An initiative like this can only be encouraged, as any investor will always prefer relief at source over reclaiming withholding tax retroactively. However, while relief at source has the potential to work really well in straight forward / direct cross border investment, the fact of the matter is that a large part of cross border investment is not straight forward at all. It is has complex and indirect structures, for a wide variety of – mostly commercial – reasons. The diversity and complexity of cross border investment raises a lot of questions which we hope the EC will consider when preparing its action plan, such as:

  • How would relief at source be applied to investments structured through tax transparent investment funds?
  • How would relief at source be applied to transparent investment funds with non-EU investors?
  • How would applying relief at source to EU investors whilst forcing non-EU investors into more burdensome and time consuming reclaims procedures because they are not within scope of the EU Directive on Administrative Cooperation (DAC) be justified in light of the prohibition on restrictions of the free movement of capital (which also extends to non-EU investors) under article 63 of the EU Treaty?
  • An increasing number of countries require minimum holding periods to counter dividend tax arbitrage through variants of securities lending transactions. How could their concerns be addressed in relief at source?

And for market players in the “withholding tax recovery space”, such as investment managers and custody banks, this could raise questions like who is contractually liable if relief at source is applied incorrectly? Should this liability be deflected? If so, how?

The action plan is definitely a commendable resolution from the EC. However, in order to avoid a general lack of adoption of its action plan, as has so far been the case for the OECD’s TRACE Implementation Package, a “legislative intervention” might just be what is required. We can only hope that the EC will properly take into account the not-so-straight-forward segment of cross border investment, which just happens to be largest part of this industry.