Explanatory Memorandum to COM(2023)324 - Faster and Safer Relief of Excess Withholding Taxes

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This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2023)324 - Faster and Safer Relief of Excess Withholding Taxes.
source COM(2023)324
date 19-06-2023


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

In the EU, investors may be generally obliged to pay tax twice on the income they receive from holding securities (namely dividends on holdings of equities and interest on holdings of bonds) in a cross-border context.

- First, taxes may be levied in the country of the issuer of the securities (the source country) in the form of a tax withheld from the gross securities income, (withholding tax (WHT)).

- Secondly, taxes may be levied in the investor’s country of residence (the residence country) in the form of income tax.

To avoid this double taxation, many countries have agreed to share taxing rights between the source and residence countries by signing double tax treaties (DTTs). Under the terms of these treaties, non-resident investors may be entitled to a lower rate of WHT or to an exemption in the source country. Besides tax treaties, some source countries have introduced rules that provide for lower rates or exemptions for specific non-resident taxpayers with specific policy objectives in mind.

This reduction or exemption of WHT may be granted in two ways. Either the reduced tax rate or exemption is applied directly at the moment the dividend/interest is paid (relief at source), or the excess tax withheld is refunded on the basis of a reclaim by the investor (refund procedure).

However, the WHT procedures that allow non-resident investors to benefit from tax treaty or domestic benefits are often burdensome, costly, and lengthy as they vary considerably across Member States both in terms of documentation to be submitted by the taxpayers to obtain the relief from WHT and as regards their level of digitalisation. WHT procedures are also still prone to risk of tax fraud and abuse, leading to revenue losses for Member States, as shown by a series of tax scandals, notably the so called Cum/Cum and Cum/Ex cases. This is due to the lack of accurate information in the hands of tax administrations, which owes to the low level of transparency within the financial chain and to the lack of information on the presence of financial arrangements linked to the underlying security

The procedures to submit a refund claim usually involve the following steps and requirements: the taxpayer (i.e. the recipient of the payments) needs to prove that it is a resident of the country with which the source Member State has signed a tax treaty. To do so, the taxpayer will need to request a certificate of residence from the tax administration of its state of residence. In addition, a number of additional forms and documents will have to be provided, depending on the source country. While typically, in the EU, source Member States will require proof that the taxpayer is the owner of the security and beneficiary of the income, they may also require all kinds of documentation related to the payment chain or specific bank certificates (e.g. dividend voucher) before refunding the excess taxes withheld. Due to recent and very significant cases of sophisticated fraud, some Member States have introduced or are about to introduce even more stringent documentation requirements as part of their procedures.

One of the most obvious forms of tax abuse are situations where taxpayers who have no entitlement to a lower WHT rate engage in transactions (e.g. securities lending or sale and buy back) with entities that would be able to benefit from a reduced WHT rate (e.g. based on the relevant tax treaty or due to their specific status) if they were the owner of the security, so as to split the savings among themselves.

This type of abuse is also known as dividend arbitrage or ‘Cum/Cum’. Another form of abuse is ‘Cum/Ex’ schemes, which work as fraudulent schemes for making multiple refund claims: deliberate short selling practices around the distribution day seek to create confusion between the economic and legal owner of the securities, which enables both parties to claim tax refunds that exceed the amount that was initially withheld by the WHT agent.

The current status quo discourages cross-border investments within the EU, especially for retail investors: in a recent survey1, close to 70% of retail investors who would be eligible to a reduced WHT rate did not claim it, citing as the main reasons lengthy, costly and too complicated procedures, which led to 31% of them to decide to sell their foreign EU stocks. Fundamentally, this goes against the objectives of the Capital Markets Union (CMU) and the retail investment package adopted 24 May 20232, and undermines the competitiveness of the EU market as a whole. Besides taking up significant resources for tax authorities, the persistent risk of fraud or abuse also has a negative impact on Member States’ tax revenues and, ultimately, on tax fairness.

The European Commission and international organisations have been analysing and trying to address the inefficiencies and the risk of fraud or abuse associated with WHT procedures for decades. In particular, the Commission put forward in 2009 a Recommendation to the Member States on simplifying WHT procedures3. In 2017, the Commission published a Code of Conduct on withholding tax4, which called for a voluntary commitment by Member States. At the international level, in 2013, the Organisation for Economic Cooperation and Development (OECD) approved the Treaty Relief and Compliance Enhancement (TRACE) Implementation Package aimed to address the inefficiency of WHT procedures as well5.

Even though these actions at EU and international level resulted in some improvement, cumbersome WHT procedures still discourage cross-border investment, especially by retail investors, remain a barrier to a well-functioning EU capital market and are still prone to risk of fraud or abuse. The overall costs of WHT procedures are estimated to be EUR 6.62 billion6.

It is for those reasons that, in 2020, in the Action Plan for fair and simple taxation supporting the recovery strategy7 and in the Action Plan on a Capital Markets Union for people and businesses8, the Commission announced a legislative initiative in the area of WHT procedures. In March 2022 the European Parliament welcomed the Action Plan for fair and simple taxation and supported its thorough implementation9. Moreover, the European Parliament strongly welcomed the Commission’s intention to put forward a proposal establishing a common and standardised system for withholding taxes, accompanied by a mechanism for the exchange of information and cooperation among tax administrations of Member States10. In 2020, the European Parliament resolving on the Action Plan on a Capital Markets Union stressed the need to reduce tax obstacles to cross-border investments, including procedures for a cross-border refund to investors, including retail investors11.

The objective of this proposal is twofold: supporting the good functioning of the CMU by facilitating cross-border investment and ensuring fair taxation by preventing tax fraud and abuse.

To achieve the objectives, this proposal introduces more efficient WHT procedures while, at the same time, providing Member States with the necessary tools to effectively fight tax fraud and abuse. The proposed changes will also have very practical and useful impacts for investors and lead to very significant costs savings for investors, estimated approximately at EUR 5.17 billion per year12.

• Consistency with existing policy provisions in the policy area

Contents

1.

This initiative is fully consistent with other initiatives taken by the Commission in the last years to achieve the key priority of fighting against tax fraud and abuse:


- In 2016, the Commission adopted that Anti-Tax Avoidance Directive (ATAD)13 to ensure a coordinated implementation in the Member States of key measures against tax avoidance stemming from the international Base Erosion and Profit Shifting actions.

- The Directive on Administrative Cooperation (DAC)14 has, since its adoption in 2011, been revised and expanded on several occasions to allow a large-scale and timely exchange of tax related information across the EU. In particular, DAC215 establishes a framework for greater tax transparency within the EU in terms of financial account information.

- DAC616 requires intermediaries to inform tax authorities of cross-border arrangements that could potentially be used for aggressive tax planning.

- In 2021, the Commission adopted a proposal for a Directive to fight against the misuse of shell entities (i.e. entities in the European Union that have no or minimal economic activity)17 to avoid or evade taxes.

However, the existing EU instruments do not contain specific measures to tackle abusive tax practices with regards to the WHT procedures. The existing rules do not provide for the reporting of information on securities transactions to tax administrations of the source Member States (including details of the payment chain with regard to the payment of dividends or interest by financial intermediaries).

As a result, they do not adequately address the specific problem of abuse. This Directive will expand transparency to allow Member States to check if the WHT rate is applied correctly to each eligible taxpayer. It will ensure that transparency is achieved in a timely manner so as to justify and permit a quick and efficient processing of applicable refund or relief requests.

As this proposal is about withholding tax procedures it will only complement the Parent-Subsidiary Directive (PSD)18 and the Interest-Royalties Directive (IRD)19, which exempt from WHT, respectively, dividends and other profit distributions, and interest and royalty payments made by subsidiaries to their parent companies and eliminate double taxation of such income at the level of the parent company. The PSD and IRD could be applicable in relation to the listed securities that are in scope of this proposal and this proposal will not restrict Member States in complying with the PSD and IRD but rather facilitate it in terms of procedure.

• Consistency with other EU policies

The proposal is fully consistent with and will contribute to support the good functioning of the CMU. The CMU seeks to make financing more accessible to EU companies, to facilitate investment by individuals and firms, and to integrate national capital markets into a genuine single market. Divergent, burdensome and lengthy WHT procedures lead to considerable costs that dissuade cross-border investment and undermine the CMU. Making WHT procedures faster, more efficient and less costly, will support cross-border investment and contribute to building a true single market for capital in the EU.

By addressing a key barrier to cross-border investment by retail investors, this proposal complements the Retail Investment Strategy that was adopted on 24 May 202320 to empower consumers to take full advantage of EU capital markets.

This Directive also complements the Shareholders Rights Directive21 (SRD) as they both share the aim of requiring transparency in relation to the final investor. The SRD facilitates shareholder identification and information flows between the shareholders and the securities issuer. Companies have the right to identify their shareholders and obtain information on shareholders’ identity from any intermediary who holds that information.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The legal basis for legislative initiatives on taxation is Article 115 of the Treaty on the Functioning of the European Union (TFEU). Although no explicit reference to direct taxation is made in this article, it does refer to issuing directives for approximating national laws that directly affect the establishment or functioning of the single market. It follows that, under Article 115 TFEU, directives are the appropriate legal instrument for the EU in this field. Based on Article 288 TFEU, directives will be binding as to the result to be achieved upon Member States but leave the choice of form and methods to the national authorities.

• Subsidiarity (for non-exclusive competence)

This proposal complies with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union (TEU). The cross-border nature of the problem at stake requires a common initiative across the single market.

The source of the problem stems mainly from the fact that among those Member States that levy withholding taxes on dividend or interest payments, different systems are being applied to provide for relief of excess taxation in cross-border situations. The following systems are being used and different thresholds or different requirements may apply in different Member States: relief at source system, quick refund system, the standard refund system or a combination thereof.

Maintaining an increasingly fragmented framework of WHT procedures in the EU causes high compliance costs for investors and financial intermediaries involved. The prevailing cross-border nature of the issue at stake requires action at EU level to simplify administrative procedures and reduce compliance costs. In the absence of such an initiative, the fragmentation of national WHT procedures impedes the effective functioning of relief procedures for cross-border operations, and subsequently the proper functioning of the single market. Therefore, EU action is required to level the playing field for national and foreign investors and for domestic and non-resident intermediaries alike.

The initiative also aims to respond to the recommendations made by ESMA in the ‘Final report on Cum/Ex, Cum/Cum and withholding tax reclaim schemes’ which concluded that specific action on taxation would be needed at EU level to effectively fight fraud and abuse.

A legislative initiative is therefore in accordance with the principle of subsidiarity, as set out in Article 5 of the Treaty on the European Union.

• Proportionality

The envisaged measures do not go beyond the minimum necessary level of protection for the single market and are therefore compliant with the principles of proportionality. The proposal does not prescribe full harmonisation but only sets out common features that would enhance the Member States' WHT systems and strengthen them against fraud and abuse.

The implementation of a common digital tax residence certificate (eTRC) would benefit investors, financial intermediaries and tax administrations. The current system, which is fragmented and partly paper-based, will be replaced by a fully digital system. This would increase the digitalisation of administrative processes in Member States and achieve efficiency gains, also enabling financial intermediaries to improve their own processes. This is an important first step forward to achieve more efficient WHT procedures.

Introducing reporting obligations for financial intermediaries would imply some costs and administrative burden. However, these costs are outweighed by the positive impact that the information received would have for tax administrations in improving WHT procedures in terms of security and effectiveness.

Moreover, this burden should be assessed against the initiatives recently adopted or announced in some Member States in response to recent scandals of tax fraud and abuse of WHT procedures – these initiatives introduce new and extensive reporting requirements for intermediaries.

A common EU-wide reporting standard would save compliance costs for financial intermediaries operating across borders as they would be faced with one reporting standard across the whole EU, instead of a patchwork of different reporting requirements.

• Choice of instrument

The proposal is for a Directive, which is the only instrument permissible under the legal basis (Article 115 TFEU).

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex-post evaluations/fitness checks on existing legislation

There is no previous existing binding legislation in the field of WHT relief procedures therefore no ex-post evaluations or fitness checks were performed.

• Stakeholder consultations

The stakeholder consultation strategy for this initiative consisted of both public and targeted consultations. An Inception Impact Assessment22 was published on 28 September 2021 with a four-week consultation period, followed by a public consultation that ran between April and June 2022, leading to 1682 responses.

Member States were consulted through the Working Party IV, bilateral meetings and two meetings at the TADEUS Forum. Moreover, meetings took place with various stakeholders, such as representatives of financial intermediaries and retail investors.

Out of all these exchanges and input received from various stakeholders, it can be concluded that there is a broad consensus on the problems arising from the different WHT procedures across Member States and on the need for EU action to tackle the fragmented and inefficient situation.

2.

However, there are differences between the main stakeholder groups on possible options to do this:


- Investors and financial intermediaries clearly considered that relief at source would provide the best results such as early relief for investors and a limited burden on intermediaries. They also acknowledged that a relief at source system would likely need to be complemented by WHT refund systems, as a back-up. Therefore, they were supportive of an initiative that would also aim to standardise the current processes and forms WHT refunds.

- Member States expressed support for introducing a common EU-wide digital tax residence certificate. Regarding the reporting obligation and a standardised procedure:

(a) Member States where the domestic rate for non-resident investors is lower or the same as the DTT rate would not be directly impacted by a standardisation of WHT procedures or reporting. Some of those Member States expressed support for action at an EU level as it will improve the position of their investors.

(b) Member States where the internal WHT rate is higher than the respective DTT rate broadly agreed on enhancing transparency and standardising WHT procedures, stressing the importance of striking a balance between making those procedures efficient and keeping the control over processes to prevent tax abuses.

All of the above-mentioned insights received from stakeholders were carefully considered in this proposal which introduce more efficient WHT procedures while, at the same time, providing Member States with the necessary tools to effectively fight tax fraud and abuse.

• Collection and use of expertise

The Commission consulted widely and received input from various sources during the preparation of the proposal. Among others, the Commission relied on publicly available information and input received from the private sector via calls and onsite sessions to discuss technical elements.

• Impact assessment

An impact assessment was carried out to prepare this initiative. The draft impact assessment report was submitted to the Commission’s Regulatory Scrutiny Board (RSB) on 16 November 2022. Following a meeting on 14 December 2022, the RSB delivered a negative opinion on 16 December 2022, suggesting some areas for further improvement. Main areas for improvement were: more clarity on the balanced weight of the two specific objectives of the initiative (improving efficiency and fighting tax abuse), an accurate description of the content, functioning and complementarity of the options and clear and complete picture of the costs and benefits of each option.

A revised Impact Assessment report was resubmitted to the RSB on 20 March 2023 with revisions introduced in response to the RSB previous opinion. In particular, it was clarified that both objectives - improving efficiency and fighting tax abuse – are of equal importance; additionally, the presentation of the options was amended to reflect three options instead of four (merging previous option 1 and 2 in current option 1 and slightly redrafting and changing the order of option 2 and 3); finally, the impact assessment was revised to provide for a more comprehensive overview of the costs and benefits and a summary chart was added to reflects the net cost/benefits of each current option for each stakeholder.

On this resubmitted Impact Assessment, the RSB issued a positive opinion with reservation on 21 April 2023. RSB asked for further clarification on the available options and on costs/savings in scope of the One In, One Out approach. Furthermore, it was requested to better reflect in the impact analysis the fact that the preferred option was giving Member States a choice between applying the relief at source and/or the quick refund system. Abovementioned reservations were addressed in the last version of the impact assessment.

3.

The Impact Assessment, as revised following the recommendations from the RSB, examined three policy options:


Option 1 – Setting-up a common digital tax residence certificate (eTRC) + common reporting

4.

Under this option, Member States could continue to apply their current systems (i.e. relief at source and/or refund procedures) but should introduce the following new elements:


- a common eTRC(with a common content and format) which would be issued/verified in a digital way by all Member States.

- a common reporting standard to increase transparency as every financial intermediary throughout the financial chain would report a defined set of information to the source Member State. It would be accompanied by standardised due diligence procedures, liability rules and common refund forms to be filed on behalf of clients/taxpayers using automation.

Option 2 - Implementing a Relief at Source System

This second option builds on the elements included in option 1 but makes it compulsory for Member States to establish a relief at source system that allows for the application of reduced rates pursuant to DTT or domestic rules directly at the moment of the payment. Under option 2, tax administrations would have to monitor the taxes due after the payment takes place.

Option 3 – Implementing a Quick Refund System within a set time frame or/and a Relief at Source

This option encompasses option 1 with the added requirement that Member States applying a refund system should ensure that the reclaim is handled within a pre-defined timeframe, a so-called the Quick refund system. Member States can introduce or continue to implement a relief at source system (as a main system or for certain low-risk payments).

The various options were compared against the following criteria: effectiveness, efficiency, coherence and proportionality.

Of all the options, option 3 is the preferred option. Option 3 is highly effective to tackle the problems identified in the EU in terms of speed, simpler processes and more digitalised procedures. While option 2 would lead to even higher cost savings for investors, option 3 gives Member States the option to retain an ex-ante control over refund requests, thus providing a way forward that should be politically feasible in all Member States. Fighting abuse is especially relevant for Member States that have been heavily hit by Cum/Cum and Cum/Ex practices during recent years. Because of political reasons, those Member States might be more reluctant to adopt a relief at source system in the short-term, as such system gives a more prominent role to financial intermediaries.

Economic impacts

Benefits

The proposed initiative will lead to costs savings for investors, estimated approximately at EUR 5.17 billion per year, including EUR 730 million per year related to a decrease in paperwork (EUR 409 million concerning EU investors). This owes to the fact that investors will incur less compliance costs, will face less instances of double taxation and will be able to reinvest the refunded money in a timely manner. This initiative will thus tackle a structural, longstanding obstacle to cross-border investment and will help EU companies raise capital from a wider base of investors, which is a core CMU objective.

While financial intermediaries would incur significant costs in the short-term to put in place the systems needed to comply with the new Directive, they are expected to benefit in the longer term from costs savings (estimated approximately at EUR 13.5 million per year) due to streamlined procedures, notably thanks to the digitalisation of some aspects of the initiative like the use of the eTRC or relief request in bulk basis.

Finally, tax administrations will be better equipped to fight tax abuse, which should have a positive impact on tax revenues eventually. The GDP is expected to be positively impacted by this initiative, in a range of 0.025%.

Costs

Financial intermediaries will face implementation costs and annual recurring costs of EUR 75.9 million and EUR 13 million respectively. Tax administrations will also incur IT development costs for implementing the eTRC (estimated in a range of EUR 4.9-54 million of development costs and EUR 0.97-10.8 million of recurring costs) and the reporting systems needed to receive data (estimated at a one-off cost of EUR 18.2 million and EUR 3.5 million per year of recurring costs). Finally, given that there will be less instances of double taxation, Member States will face a reduction in tax revenues estimated at EUR 2.2 billion.

• Regulatory fitness and simplification

The proposal has, as one of the main specific objectives, the introduction of digitalisation in the WHT procedures in order to achieve fully automated ways of issuing the eTRC, the reporting of information, the submitting of a request for relief or refund and checking the data. Another objective sought by the initiative is to avoid the proliferation of different systems in Member States by standardising some elements of the WHT procedures.

In terms of the One In, One Out approach, the initiative will lead to cost savings for investors related to a decrease in paperwork (EUR 409 million per year) and cost savings for financial intermediaries related to streamlining procedures (EUR 13.5 million per year). At the same time, financial intermediaries will bear implementing costs of EUR 75.9 million one-off and EUR 13 million in recurring costs.

The proposal will introduce reporting obligations for financial intermediaries. Obtaining granular information is crucial for the tax administration of the source Member State to be able to assess and apply the appropriate reduced WHT rates and efficiently identify abusive practices, therefore achieving one of the objectives of the initiative. To limit the burden stemming from the reporting, the information to be reported by financial intermediaries has been limited to what is necessary to Member States to reconstruct the payment chain for dividends and interest and to the extent such information is available to reporting financial intermediaries. Moreover, reporting will be done by using standard computerised forms and common requirements for the communication channels to be laid down by the Commission by means of implementing acts.

In addition, for the sake of simplification and bringing lighter requirements to the WHT procedures for small investors, a de minimis rule has been introduced for the reporting obligations and due diligence procedure. It consists of not requesting information about financial arrangements or minimum holding period to investors with dividend payments below a threshold of EUR 1000.

• Fundamental rights and equality

Fundamental rights, in particular the requirements concerning the protection of personal data under the General Data Protection Regulation (‘GDPR’), are safeguarded. The personal data will only be processed for the purposes of verifying that the correct WHT rate is applied to the taxpayer and mitigating the risk of tax fraud and abuse. Personal data will be transmitted only between entities which are involved in the WHT relief procedures under this Directive. The amount of personal data to be transmitted will be limited to what is necessary to detect underreporting, non-reporting or tax fraud or abuse, in line with the GDPR requirements. Personal data will be retained only as long as necessary for this purpose.

Equality, including gender equality, is not significantly impacted by this initiative.

• Other impacts

No other significant impacts. However, the initiative is expected to have limited positive social impact, since it would ensure fairer taxation; as well as a limited positive environmental impact, given the expected reduction in paper-based refund processes. Therefore, the current initiative is consistent with the fulfilment of the climate-neutrality objective as requested by the European Climate Law.

The proposal upholds the ‘do no significant harm’ and ‘digital by default’ principles and contributes to achieving the European way for a digital society and economy.

The relevant Sustainable Development Goals partially addressed by the initiative are 8 (Decent work and economic growth), 9 (Industry, innovation and infrastructure) and 16 (Peace, justice and strong institutions) as presented in Annex 3 of the impact assessment.

4. BUDGETARY IMPLICATIONS

The main budgetary implications of the initiative for the Commission include implementing the electronic tax residence certificate and establishing the formats and communication channels to be used by financial intermediaries to report to the national tax authorities. The legislative financial statement provides details regarding the human and administrative resources required.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

For the purpose of monitoring and evaluating the implementation of the Directive, Member States shall provide the Commission with data on an annual basis reflecting relevant information on the functioning of the Directive. The relevant information is to be defined via an implementing act as stated in Article 19 of the Directive.

The Commission shall evaluate the Directive five years after national rules transposing the Directive come into effect and every five years thereafter.

• Detailed explanation of the specific provisions of the proposal

The proposal is structured in two building blocks which are covered in chapters 2 and 3, respectively. Chapter 2 provides for the creation of an EU-wide digital tax residence certificate, whilst Chapter 3 deals with the WHT relief procedures. It includes the procedure to establish National Registers for specific financial intermediaries (Certified Financial Intermediary - CFI), standardised reporting obligation for such CFI, and the obligation for Member States to set up a relief at source system or a quick refund system or a combination of both to ensure swift and secure relief from WHT, based on DTT or domestic rules, for EU and non-EU investors, when certain transparency conditions are met. As these procedures concern only specific Member States that need to provide relief of excess withholding taxes, Chapter 3 is binding only on those Member States.

(i) Common digital tax residence certificate (eTRC)

The eTRC is to be introduced by all Member States and will provide a fast, easy and secure administrative process to confirm EU taxpayers’ tax residency.

As laid down in article 4 there will be a common content for the eTRC, regardless of the issuing Member State, i.e. the Member State of residence. The elements established in paragraph 2 as common content for the eTRC are those identifying the requesting taxpayer and confirming that they are resident in the Member States according to its national rules.

Targeted consultations with Member States revealed that in terms of establishing investor residency, the same rules apply to deem the investor resident or not in a given Member State, regardless of the country of investment. Therefore, the Member State of the investment does not need to be mentioned in the eTRC. Such information will however be included in the relief request in order to identify the applicable reduced rate.

As the aim is to set up a standardised eTRC, which can be used to streamline WHT procedures, but which can also be used for other purposes, the proposal allows for adding information for those purposes.

Given that one of the objectives of this initiative is to reduce the administrative burden for tax administrations, investors and the financial industry, it is proposed that the eTRC covers at least the full calendar year in which it is requested. However, if the circumstances at the end of the year do not support the content of the eTRC issued during the year, such eTRC can be deemed not valid by the issuing Member State and any other Member State concerned. The minimum covered period of the eTRC (one calendar year) should not be interpreted as preventing Member States from issuing eTRC with a longer covered period, depending on the concept of tax residence and internal decision of each Member State. Member States shall recognise the eTRC issued by another Member States as adequate proof of residence of a taxpayer in that other Member State, to the extent that such eTRC continues to be considered valid by the issuing Member State.

Member States will be required to issue an eTRC within one day, as long as they have been provided with a specific set of information and provided that no exceptional circumstances occur justifying a delay. In cases where the one-day issuance will not be met, the requested party should be notified by the Member State concerned. To meet the requirement of one-day issuance, a fully automated system to issue the eTRC should be implemented by Member States, which allows for requests via an online portal accessible to the taxpayer and parties authorised thereby (e.g. financial intermediaries requesting the eTRC on behalf of their clients).

The eTRC will be secured using an electronic seal in conformity with Regulation (EU) No 910/2014 of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market (the eIDAS Regulation)23. The envisaged method offers the possibility of both human and machine-readable versions of the digital tax resident certificate with PDF documents, or similar other formats, which can be used by automated systems.

(ii) Member States’ National Registers

In order to benefit from the WHT relief procedures at the core of the Directive, investors will need to be able to engage with financial intermediaries that are certified to provide those services. There are two grounds for being certified as a Certified Financial Intermediary (CFI) and thus accessing the procedures of this Directive:

- On a compulsory basis: for (1) large institutions, as defined in article 5 paragraph 2 of Regulation (EU) No. 575/201324, and (2) Central Securities Depositories in the scope of Regulation (EU) No. 909/201425 that are providing withholding tax agent services and that as such need to register with those Member States in which securities’ issuers are located and where any of their clients have invested in.

- On a voluntary basis: for all other entities (including those that are established in a third country jurisdiction) acting as financial intermediaries and meeting specific requirements by registering in one or several of the National Registers set up in accordance with this Directive, at the discretion of the concerned intermediary; it is expected that registration should be with those Member States where their clients have investments in.

Member States that do not need to provide relief of excess withholding tax, due to an exemption on WHT over dividend payments or in case the relevant domestic tax rate is always lower than or equal to the rate that could be applied under DTTs, do not need to have a National Register in place. Member States opting-in for providing relief at source or quick refund on excess tax withheld on interest on bonds as foreseen under this Directive should by default use the National Register already established to provide relief on excess tax withheld on dividends, or otherwise set up a National Register.

Non-compliant CFIs, including those non-compliant with registration requirements, will be subject to removal from the National Registers and/or penalties.

(iii) Common reporting

This Directive aims to help in the fight against tax fraud and abuse in the field of excess WHT relief procedures and to make these procedures effective. Introducing transparency in the financial chain serves these two objectives since it enables the source Member State to receive the information needed to check that the correct WHT rate applies and to assess if anti-abuse rules needs to be applied. Setting up a common standard for reporting across the EU saves compliance costs for investors and financial intermediaries and allows for swifter and safer WHT relief procedures.

Who has to report and to whom?

The reporting obligations derive from the registration in one of the National Registers. All CFIs included in one or more of the National Registers are subject to reporting to the authority maintaining the register, and where applicable to the withholding tax agent, regardless of their country of residence (EU or outside the EU; or in a Member State with or without an own National Register in place).

CFIs registered in any National Register need to report where their clients’ investment takes place in a Member State that has a National Register. Such source Member State will need to provide for relief and therefore needs to reconstruct the securities payment chain and identify the final investor. The Directive does not exclude the possibility that CFIs outsource the reporting obligation to another financial intermediary within the custodial chain insofar as the respective CFI remains accountable of the completion and correctness of such reporting.

Non-compliance with the reporting obligation will lead to penalties.

What has to be reported?

The Directive lays down a common set of reporting elements in Annex II. Each CFI shall report only on the part of the transaction that is visible for it, i.e., from whom it is receiving the dividend/interest and to whom it is paying the dividend/interest. Thus, the recipient of the full reporting, either the source tax administration or a WHT agent designated on its behalf, will have all the information needed to reconstruct the financial chain of the transaction from the investor to the securities’ issuer.

The information reported to the tax administration will enable it to ascertain the identity of the final investor and his/her potential entitlement to the reduced WHT rate. Hence, the risk of double refunds is mitigated and the capacity for tax administrations to identify and combat other abusive and fraudulent practices, such as Cum/Cum, is enhanced.

Heading E of Annex II provides for two reporting requirements that are aimed at helping to combat WHT abuse, mainly Cum/Cum abuse schemes, (i) information about the holding period of underlying securities and (ii) information about financial arrangements linked to the securities for which the taxpayer is requesting relief.

The first element seeks information on whether the underlying securities have been bought within 2 days before the ex-dividend date, with the objective of helping prevent further fraudulent/abusive schemes for multiple reclaim of the same WHT when only one single reclaim should apply (Cum/Ex schemes).

The second element seeks information on whether the reporting financial intermediary is aware of any financial arrangement involving the underlying securities that has not been settled, expired or otherwise terminated at the ex-dividend date, with the objective of helping the tax administration to detect abusive tax arrangements (Cum/Cum schemes). A financial arrangement may be for example a repurchase agreement (repo) or securities lending but also derivatives products such as single stock futures. More specifically, a repurchase agreement involves the sale of securities at a specific price with a commitment to repurchase the same or similar securities at a fixed price on a specified future date. Securities lending involves transfer of the ownership of a security in return for collateral, usually another security, on the condition that the ownership of that security or similar securities will revert to the original owner at a specified future date. The definition is broad in order to allow to comprise different types of arrangements.

As the above schemes have been observed only in relation to dividend payments, the reporting elements under Heading E are not required in relation to interest paid on bonds. The same approach is followed with regard to very low amounts of dividends paid, which are considered to be low-risk cases that cannot justify the relevant reporting burden on CFIs. This does not preclude however Member States from applying appropriate consequences where they actually identify abuse, even for a low amount.

How will the reporting take place?

The reporting will take place via a standardised XML format scheme that will be set out in an implementing act to be adopted by the Commission. The automated channel to deliver the information from the economic operators to the corresponding tax administration or WHT agent acting on its behalf will be standardised and set out in this implementing act.

When is the reporting obligation arising?

The timeline to report the information comprised in Annex II is 25 days at the latest from the record date. Reporting should take place as soon as possible after the record date, unless a settlement instruction in respect of any part of a transaction is pending on the record date, in which case the reporting for that transaction should occur as soon as possible after the settlement. In practice all positions are normally settled within 10-15 days from the record date. If this has not happened by the 20th day, in order to achieve efficient relief of excess withholding taxes, the Directive requires that CFIs should still proceed with reporting the situation as on the 20th day and within the next 5 following days.

In Member States where relief at source will apply and the dividend payment date is earlier than 25 days from record date, the financial intermediaries should have a mechanism in place to timely provide information to the WHT agent on the rate to be applied.

(iv) Systems of relief

The proposal provides: (a) a relief at source system; and (b) a quick refund system. Under a relief at source system, the correct amount of taxes is applied by the WHT agent at the time of the dividend/interest payment (article 12). Under a quick refund system, the tax is withheld at the higher rate applied in the source country but the excess tax is then given back within a set time frame of maximum 25 days from the date of the request or from the date when the required reporting is fulfilled, whichever the latest. This should take place within 50 calendar days from payment date (article 13). In both cases, the relevant actors in the procedures would be CFIs acting on behalf of their investors. Articles 10 (request for relief at source or quick refund) and 11 (due diligence procedures) lay down elements that are common to both systems.

While applying the relief procedures, the competent tax administration may decide to outsource the relevant tasks to a nominated withholding tax agent instead of managing the tasks alone.

Each Member State that applies relief procedures for excess withholding tax may decide to apply the relief at source or quick refund system or both as well as whether or not to use the above outsourcing possibility. However, such Member States need to ensure that at least one of the two systems is available to all investors and actually activated and, in all cases, that the conditions set out by this Directive are met. Within these two systems Member States have the discretion, for instance, to only allow low risk taxpayers to request relief at source whilst other taxpayers can only request a quick refund. Member States that do not use excess withholding tax relief procedures because they do not provide for withholding tax at all or they do not provide for different rates of withholding tax in different circumstances are not concerned by these systems and are not required to take action.

In all cases, with respect to evidence of the residence of the investors, Member States should rely primarily on the eTRC, as defined in article 4, or an appropriate proof of tax residence from a non-EU country.

A major goal of this Directive is to prevent abusive/fraudulent tax practices and in particular Cum/Ex and Cum/Cum schemes. Member States’ tax administrations that wish to have more time to do some checks before agreeing to give relief have the possibility to not apply the relief at source or quick refund systems to be introduced under this Directive in some specific circumstances. This possibility is specifically envisaged in the case of a request for exemption and when information provided under heading E of Annex II indicates that the underlying securities have been acquired within two calendar days of the ex-dividend date and/or that the financial intermediary reports being aware of a financial arrangement involving the underlying securities that has not been settled, expired or otherwise terminated at the ex-dividend date.

Where the relief at source and quick refund systems set out in this Directive do not apply, a standard refund procedure will be applied, where the taxpayer or its appointed representative, which does not necessarily have to be a financial institution, are able to directly request a refund to the tax authority. This Directive also ensures that at least the content of the information to be reported to the tax authority will cover the information envisaged under heading E of Annex II.

General Provisions

Chapter 4 deals with general and final provisions and in particular, implementing acts, evaluation and monitoring, data protection rules, transposition and entry into force. This proposal, once adopted, should be transposed into Member States’ national law by 31 December 2026. It should come into effect as of two years after the implementing acts have been adopted, which is expected to be by 1 January 2027.