The EU Commission wants to introduce a standardised system of withholding tax relief to be in force on January 1, 2027.
Strengthening relief at source and quick refund procedures: The intention is to make it easier and faster for investors and financial intermediaries to obtain relief from withheld tax in the future. Complementing the existing standard refund procedure, the EU proposal introduces two fast-track procedures to speed up and harmonise the relief process. Member states will have the flexibility to choose between relief at source or a quick refund – or even opt for a combination of both.
With the introduction of a standard digital residence certificate in the EU, the procedures for withholding tax relief are expected to be accelerated and streamlined. Thus, investors holding a diverse portfolio within the EU will only need ONE digital tax residency certificate to apply for multiple refunds within a calendar year. This certificate will be issued within one business day of submitting a claim, replacing the current dependency on paper-based processes in most member states.
Firstly, many European countries, e.g. Germany, have already introduced a decentralised procedure for residence certificates. Secondly, the proposal is in conflict with the OECD’s TRACE-IP model, which has already been implemented in Finland, and the U.S. QI system.
Let’s highlight further critical aspects and implications for financial institutions and tax administrations from the FASTER proposal:
The FASTER initiative requests the tax administrations of the 27 member states to implement an electronic tax residency certification system within the next three years. This represents a major challenge, especially for governments with little experience with large-scale technology projects. Decisions made on existing paper procedures and the choice of implementation methods add to the complexity.
Financial institutions and third-party providers may want to submit requests on behalf of their customers to integrate the new systems into their commercial tax services. However, concerns about security and fraud risks are leading to an increasing trend to restrict third-party filings. In the U.S., the IRS already allows collective applications for its equivalent, Form 6166. FASTER’s proposed collective applications with a one-year validity period could lead to a wasteful accumulation of unused forms.
Handling expired eTRCs should be easier based on the date of issue, but integrating electronic files with core banking systems, KYC and tax withholding procedures is challenging. The need to automatically replace expired eTRCs adds to the complexity. If member states adopt a self-submission approach, financial institutions will face delays as investors grapple with tax withholding regulations and institutions will retain expired eTRCs for audit trails.
The introduction of eTRCs in the EU contrasts with approaches in the OECD and the U.S., which use self-certification of tax residency and treaty benefits (ISDs). ISDs have proven beneficial in reducing the workload and costs for tax administrations while sharing risk and liability between investors and financial institutions. Given that self-certification has been used successfully in major markets for more than two decades, the EU’s approach seems unconventional.
A standardised withholding tax relief system for the entire European Union: In its fundamental idea, a reasonable initiative, as the proposal aims at safer, faster and more efficient tax relief procedures, which in return will benefit investors, financial institutions and the authorities.
The standard refund procedure will be maintained, implying that three procedures would be available. Countries such as Germany would therefore have to introduce two new procedures by 2027. In this regard, it may be noted that Germany is just starting with MiKaDiv and the new mass data interface for the standard refund, imposing a set of new rules, a new technical interface and additional reporting procedures on investors and financial institutions.
This modification in itself will increase the implementation and maintenance effort for authorities and financial institutions, both in Germany and abroad. But the new relief at source and quick refund models, as well as the Central Registry of CFIs and the Digital Residence Certificate system from the FASTER proposal, would also need to be included on top of it.
We look forward to seeing where this initiative is headed. It is worth noting that the directives must be unanimously approved by all EU member states in order to be effective.
