Background

The current system of withholding tax (“WHT”) in many Member States is fragmented and convoluted, with large divergences between Member States in terms of procedure and processing times, which acts as a barrier to cross-border investment and increases the risk of tax avoidance and fraud.  The scale of the problem is evident from the estimates made by the European Commission in its impact assessment that the overall cost of WHT procedures in the EU amount to EUR 6.62 billion annually.

The Irish tax authorities currently operate a simplified system for outbound payments. Therefore, the proposal will primarily benefit Irish companies in receipt of inbound payments of interest and dividends on publicly traded instruments from other EU Member States.

The FASTER Directive aims to streamline WHT procedures on the payments of dividends and interest on publicly traded instruments within the EU to non-resident investors. It aims to promote cross-border EU investment and strengthen European capital markets, while giving added protection against potential tax fraud and abuse. Although the Commission proposal envisaged a 1 January 2027 implementation date, the compromise text of the Directive agreed at ECOFIN pushes this out to 1 January 2030.

Changes from the Commission Proposal

The FASTER Directive as agreed at ECOFIN contains a number of important changes from the Commission proposal including:

• An exemption from the application of the relief systems for certain Member States that already have a comprehensive relief at source system and meet a prescribed market capitalisation ratio.
• Longer period for Member States to issue a digital residence certificate.
• Longer period for Member States to complete the Quick Refund System.
• Broader powers to Member States to remove certified intermediaries from national registers.
• Broader discretion on the category of cases that Member States can refuse access to the fast-track procedure, including acknowledgment of high-risk cases.

These will be discussed in more detail below.

FASTER Directive Details

The key elements of the FASTER Directive text include:

EU Digital Tax Residence Certificate (eTRC) 

• The FASTER Directive introduces a common and digital tax residence certificate (“eTRC”), which will be recognised by all Member States as proof of residence for WHT relief procedures.
• The eTRCs are designed to be standardised and machine-readable.
• Member States are expected to issue an eTRC within 14 calendar days from the submission of a request by a resident of the relevant Member State. This is a longer time than the one day initially envisaged by the Commission proposal.  
• The validity of the eTRC will not exceed the calendar year or the fiscal year for which it is issued.

To benefit from the fast-track procedures under the FASTER Directive, investors will need to engage with Certified Financial Intermediaries (“CFIs”) who will be obliged to assist with the fast-track procedures. In this context, CFIs shall be required to be recorded in a national register of CFIs.  ‘Large institutions’ (as defined in the EU-Regulation (EU) 575/2013) that handle payments of dividends and central securities depositories (as defined in Regulation (EU) 909/2014) that provide WHT agent services are obliged to register as a CFI on the national

Certified Financial Intermediaries (CFIs) 

To benefit from the fast-track procedures under the FASTER Directive, investors will need to engage with Certified Financial Intermediaries (“CFIs”) who will be obliged to assist with the fast-track procedures. In this context, CFIs shall be required to be recorded in a national register of CFIs.

 ‘Large institutions’ (as defined in the EU-Regulation (EU) 575/2013) that handle payments of dividends and central securities depositories (as defined in Regulation (EU) 909/2014) that provide WHT agent services are obliged to register as a CFI on the national registers. In addition, national CFI registers may include, on a voluntary basis, smaller entities acting as CFIs (including those that are established in a third country jurisdiction).

The FASTER Directive as agreed at ECOFIN, includes provision for a central electronic access point for financial intermediaries to register for the Member State register. The FASTER Directive also includes more powers and discretion for the Member States to reject or remove CFIs in certain circumstances than initially envisaged under the Commission Proposal. Member States are also given the discretion to decide on a system of penalties for non-compliant CFIs.

It is the obligation of the CFI to collect the eTRC, and a declaration that such investor is entitled to the relief of withholding tax according to the legislation of the source Member State or a double tax treaty. When required by the source Member State, confirmation must also be given by the CFI that the investor is the beneficial owner with respect to the dividend or interest. It is also for the CFI to confirm the relevant applicable withholding tax rate.  

The preamble does state that these obligations should be understood in the sense that the closest certified financial intermediary to the investor (i.e. its client) should take reasonable measures to perform such checks in good faith.

Two Fast-Track Procedures 

• The FASTER Directive requires Member States to offer relief for excess WHT on dividends and certain payment of interest on publicly traded shares issued by a resident in their jurisdiction.
  
• In light of the principle of proportionality, the text of the FASTER Directive as agreed at ECOFIN contains an exemption  from the necessity  to apply the quick relief systems and on obligations on registration and reporting of CFIs where the Member State has both a comprehensive relief at source system and a market capitalisation ratio of 1.5% or more for four consecutive years, as reported by the European Securities and Markets Authority at the date of transposition of the FASTER Directive. The FASTER Directive contains criteria which must be satisfied to demonstrate that a comprehensive relief at source system exists in a Member State. This feature was not included in the Commission proposal last year.
  
• If domestic WHT refund procedures fall under the FASTER Directive, Member States must implement either one or a combination of two fast-track procedures:
  • Relief at Source System: Here, the reduced tax rate or exemption applicable under the relevant double tax treaty or domestic statutory provisions is applied at the time of payment of dividends or interest.
  • Quick Refund System: In this case, any excess WHT is refunded. Refund requests are processed by the tax authority of the source state within the second month following the dividend or interest payment date. The excess WHT is then refunded within 60 calendar days after the end of the request period. If these refunds are not processed within these deadlines, Member States must apply late payment interest where national legislation includes such provisions. This time limit is longer than the 50 calendar days envisaged in the Commission proposal.
    
• Member States can fully or partially exclude relief requests in the following scenarios, some of which are viewed as high-risk cases.
  • where the dividend is paid on a publicly traded share that has been acquired by the owner within five days of the ex-dividend date.
  • cases where the intermediary is not a CFI.where the dividend payment made on the underlying security is linked to a financial arrangement that has not been settled, expired, or otherwise terminated before the ex-dividend date.
  • where the dividend payment exceeds a gross amount of at least [100.000 EUR], per registered owner and per payment date (with the exception of large regulated collective investment undertakings and certain pension funds).
  • A reduced withholding tax rate not deriving from the double tax treaties is claimed.
  • An exemption from withholding tax is claimed.
    
• For investors who invest through collective investment undertakings (like investment funds) rather than directly in securities, the FASTER Directive provides special provisions for relief in cases where collective investment undertakings or their investors may be entitled to relief but are not the registered owner because the underlying securities are held by a different legal person or by a fiscal transparent collective investment undertaking.
  
• WHT refund procedures not covered by the FASTER Directive (like WHT on dividends paid out on non-publicly traded shares) are subject to standard refund systems according to the domestic laws of the Member States.

Implementation

The EU Parliament issued its non-binding report on this proposal in February 2024 and will now be consulted again on the text of the Directive as agreed at ECOFIN.  It is expected that the FASTER Directive will formally be published in the EU’s Official Journal and then enter into force in autumn 2024.

Member States are obliged to transpose the provisions of the FASTER Directive into their domestic legislation by 31 December 2028, but the domestic rules will only apply from 1 January 2030.