The European Commission’s “Faster” proposal aims to streamline withholding tax processes for cross-border investments within the EU, promising an estimated annual cost savings of €5.2bn for investors. While the initiative is generally welcomed by the industry, a few business associations have expressed certain reservations.
The European Commission unveiled its Faster and Safer Tax Excess Relief (Faster) proposal on 19 June 2023, with a public comment period closing earlier this month. This initiative is part of a broader effort to standardise and simplify withholding tax relief procedures across the European Union. Previously, such procedures had been criticised for their complexity, inconsistency and reliance on outdated paper-based systems.
The commission contends that these inefficiencies have been a deterrent to cross-border investments, thus stifling the growth of EU capital markets and making the system vulnerable to tax fraud schemes like cum-ex.
According to a 2021 study by the European Commission’s Joint Research Centre, the average withholding tax rate for EU member states was 3.4% on interest income and 13.9% on dividends. This effectively offers non-resident portfolio investors a 7.4 percentage point reduction compared to domestic investors.
Challenges in existing withholding relief procedures
Investors who aim to claim excess tax relief currently face a cumbersome and expensive process, requiring various official forms including a ‘residence certificate.’ A 2023 survey by Better Finance, a not-for-profit that represents financial services consumers, found that 70% of retail investors experiencing double taxation didn’t claim relief due to these difficulties. Additionally, a 2021 European Central Bank survey highlighted the continuing reliance on paper-based procedures across the EU.
Faster framework
Faster aims to expedite withholding tax relief by introducing two streamlined systems: ‘relief at source’ and ‘quick refund.’ These methods will be bolstered by digital residency certificates and standardised reporting requirements for financial intermediaries.
The proposal is expected to be transposed into national law by 2027, and it is anticipated to save investors around €5.2bn per year, while slightly boosting the EU’s gross domestic product (by 0.025%), with added benefits to capital, wages and employment.
The commission acknowledged a projected €2.2bn tax revenue loss due to unclaimed relief but it contended that strengthened provisions against tax fraud may offset this loss.
Feedback from financial associations and agencies
A public consultation initiated by the commission in April 2022 revealed that nearly 89% of participants strongly concurred that the existing withholding tax procedures are a hindrance to cross-border investment within the EU. The survey also showed a predominant preference for a unified EU ‘relief at source’ system.
Both the European Banking Authority and the European Securities and Markets Authority have previously published exhaustive reports on cum-ex fraud. Notably, Esma advised that national securities market authorities should collaborate with tax agencies to help uncover fraudulent tax reclaim activities.
During the feedback period from 19 June to 18 September 2023, the commission received 274 responses, including 41 from business associations and companies.
As the largest fund domicile in Europe and a key player in cross-border fund distribution, the Association of the Luxembourg Fund Industry represents more than 1,500 Luxembourg-based investment funds, asset management companies and other sector-relevant businesses. While Alfi offered support for the proposal, stating, “Alfi has always been in favour of introducing rules that are as harmonised as possible at EU level, which would eliminate the legal uncertainties surrounding the procedures for relief at source or refund of excess withholding tax paid,” it also urged the need for comprehensive and unambiguous rules and guidelines. Alfi expressed reservations about the ambitious target of full implementation by 1 January 2027, noting, “this timeline may seem ambitious.”
The Luxembourg Bankers’ Association (ABBL) too expressed reservations, specifically noting that “the obligations vesting to financial intermediaries under the proposal at hand and related liabilities, as currently envisaged, may outweigh the benefits attached to the contemplated fast track procedures.”
Belgium-based Better Finance also issued a warning, emphasising that it “remains key to address potential exclusions, gaps and cost uncertainties to ensure that all retail investors benefit from their rights derived from securities ownership and to stimulate intra-EU investment.” Euroclear voiced concerns, including “the optionality for Certified Financial Intermediaries to opt to offer or not tax relief at source, or quick refund services as part of their service offer; and the need for the introduction of the concept of nominated third party.” Lastly, Invest Europe viewed the proposal as a “positive step to speed up withholding tax refund procedures and reduce administrative costs and barriers for cross-border investors,” particularly given the lack of enforcement of the previously established Code of Conduct on withholding tax from 2017.
