The European Commission proposed new rules on Monday that will make withholding tax procedures in the EU more efficient and safer for investors, financial intermediaries (e.g. banks) and member states’ tax administrations, according to the a communique of the Community Executive.
This initiative – a key element of the Communication on business taxation for the 21st century and the Commission’s 2020 Action Plan on the Capital Markets Union – will promote fairer taxation, fight tax fraud and support cross-border investment across the EU.
The term “withholding tax” refers, for example, to the situation where an investor resident in an EU member state is obliged to pay tax on interest or dividends obtained in another member state. Cross-border investors often find themselves in this situation. In such a scenario, to avoid double taxation, many EU member states have signed conventions that avoid double taxation of the same person or company. Thanks to these conventions, cross-border investors can submit a refund claim for any excess tax paid in another member state.
The problem is that these repayment procedures are often long, expensive and cumbersome, generating frustration for investors and discouraging cross-border investment within the EU and investments made outside the Union. Currently, the withholding procedures applied in each Member State vary greatly. Investors have to use over 450 different forms across the EU, most of which are only available in national languages. At the same time, the Cum/Ex and Cum/Cum scandals revealed how refund procedures can be abused: the fiscal losses resulting from these practices were estimated at 150 billion euros for the period 2000-2020.
The main measures proposed on Monday will make life easier for investors, financial intermediaries and national tax authorities. A common EU-wide digital tax residence certificate will make withholding tax reduction procedures faster and more efficient. For example, investors with a diversified portfolio in the EU will need a single digital tax residency certificate to claim multiple refunds during the same calendar year. The digital fiscal residence certificate would be issued within one working day of submitting an application. Currently, most Member States still use paper-based procedures.
There will be two accelerated procedures that complement the existing standard refund procedure: a ‘withholding tax’ procedure and a ‘quick refund’ system, which will speed up and harmonize the process of withholding tax reduction across the EU. The member states will be able to choose between the two, with the possibility of opting for a combination. Under the “reduction at source” procedure, the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules provided in the provisions of the double taxation convention. Under the “quick refund” procedure, the initial payment is made at the withholding tax rate of the Member State in which the dividends or interest are paid, but any overpaid taxes are refunded within 50 days of on the date of payment.
It is estimated that these standardized procedures will allow investors to save approximately €5.17 billion per year.
A standardized reporting obligation will give national tax administrations the necessary tools to check eligibility for the reduced rate and detect potential abuses. Certified financial intermediaries will be required to report the payment of dividends or interest to the relevant tax administration so that the latter can trace the transaction. More precisely, the large financial intermediaries in the EU will be obliged to register in a national register of certified financial intermediaries. This register will also be open to smaller financial intermediaries from outside the EU, on a voluntary basis.
Taxpayers who invest in the EU through certified financial intermediaries will benefit from accelerated withholding procedures and avoid double taxation of dividend payments. The more financial intermediaries are registered, the easier it will be for the tax authorities to process refund requests, regardless of the procedure used.