The current system of withholding tax in many Member States is fragmented and convoluted. Arthur Cox LLP welcomes the proposals as an example of how European tax initiatives can increase tax certainty for taxpayers and lessen administrative burdens. 

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 from other EU Member States and particularly those in receipt of dividends from listed companies, which has been identified as being particularly problematic. The proposal is expected to save investors approximately €5.17 billion annually.

Background

On 23 June 2023, the European Commission adopted a proposal for an overhaul of the withholding tax regime in the EU to create a faster, simpler and saver process for investors, financial intermediaries and tax authorities. The current system is fragmented 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. If agreed, the new system will be applicable from 1 January 2027.  The key components of the proposal are:

A common EU digital tax residence certificate (eTRC).

The certificate will be issued within 1 day via an online application and remain valid for at least one calendar year. The certificate will be taken by other MS as proof of residence in the MS of issue and will enable multiple refunds to be carried out across different Member States.        

Two fast-track procedures

To complement the existing standard refund procedure, two new procedures will be introduced, a “relief at source” procedure and a “quick refund” system.

The “relief at source” procedure will apply the rules of the double tax treaty provisions directly, so that the correct amount of tax is applied by the WHT agent at the time of the interest / dividend payment.

Under the “quick refund” procedure, the initial payment of the interest /dividend is subject to withholding tax at the higher rate of tax applicable in the source country, however, the excess tax will then be refunded within a set time frame of 50 days from the initial payment.

Member States have the discretion to combine these procedures so that, for instance, the relief at source procedure would only be allowed for low-risk taxpayers whilst other taxpayers would be required to make a “quick refund” request.

Certified Financial Intermediaries (CFIs)

In order to benefit from the WHT relief procedures at the core of the Directive, investors must engage with CFIs. Large EU financial intermediaries and Central Securities Depositories will be required to join a national register of certified financial intermediaries. This register will also be open to non-EU and smaller EU financial intermediaries on a voluntary basis.

Common Reporting Obligations

The proposal comes in the wake of the cum/cum and cum/ex tax avoidance scandal in Germany, and as such seeks to make withholding tax refund procedures more secure and transparent to mitigate against tax avoidance and fraud. The proposal includes standardised reporting obligations that will increase transparency and provide national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse.

CFIs must register in a Member State and will be required to report the payment of dividends or interest to the relevant tax administration.  Each CFI is only obliged to report the part of the transaction visible to it. The ultimate recipient of the complete reported information, either the tax administration in the source Member State, or a designated WHT, will have all the necessary information on the financial chain of the transaction from the investor to the securities’ issuer. This enables the tax authority to ascertain the correct identify of the final investor and confirm their entitlement to the reduced WHT rate.

Feedback on the proposals is welcome prior to 15 August 2023.

Conclusion

While the proposal is to be welcomed, the Commission could indeed go further.  It has long been recognised that WHT is economically more damaging to cross border trade as it taxes turnover rather than profit in contrast to purely domestic investment which is taxed only on profit.  It follows that WHT should be eliminated on intra-EU flows. The Commission should seek to expand the Interest and Royalties Directive and the Parent Subsidiary Directive to all payments of interest, royalties and dividends beyond just those in a corporate group.