Proposal on more efficient and secure withholding tax procedures

Earlier this year, the European Commission published a legislative proposal for a Directive setting forth rules for a Faster and Safer Relief of Withholding Taxes (FASTER). The aim is to streamline and standardise tax-related processes for investors across all Member States, with the centre of the proposal focusing on three initiatives.

(i) An EU digital tax residence certificate (eTRC)
(ii) Implementation of fast-track systems for refund of withholding tax
(iii) New reporting and registration requirements for financial intermediaries

The EU tax residence certificate aims to harmonise refunding procedures for investors by introducing one common digital tax residence certificate to be used across all the Member States to the benefit of investors with refund claims in other Member States.

The European Commission proposes two different fast track systems for the refund of withholding tax: a "relief at source" system and a "quick refund" system. Either one or both systems can be implemented in the Member State to exist alongside the already established standard system for refund of excess withholding tax.

The relief at source system would mean that the relevant reduced withholding tax rate would directly be applied at the dividend payment.

The quick refund system would imply that the repayment of excess tax should take place within 50 days of the payment of dividend. If the repayment does not meet the deadline an interest should be paid by the Member State at the rate the Member State normally requests the taxpayer to pay on overdue tax payments.

The proposal will obligate financial intermediaries to report information on payments of dividends to the relevant tax administration to ease the trace of the transaction. The information relates among other things to details on identity of the receiver of the dividend, the identity of the distributing entity, and information that could suggest abuse such as lending out of shares.

The directive proposes that these reporting requirements shall be met no later than 25 days after the record date, which in many cases will be the day before the payment of the dividend.

The directive also obligates the financial intermediaries to verify various information including on the tax residency of the registered owner and they must comply with anti-money laundering obligations regarding investors etc.

The proposal also suggests that the Member States establish rules which will make the financial intermediaries liable for a Member State's loss of tax income if obligations in the directive are not fulfilled and the intermediaries have acted with gross negligence or intend. It is also suggested that sanctions to financial intermediaries are enforced in cases of non-compliance with the reporting rules.

If adopted the directive is supposed to be implemented by 31 December 2026 coming into force on 1 January 2027.

Generally, the Danish government is positive towards the suggested directive as they believe it will ensure a fair taxation and avoid tax abuse. They wish to ensure that the fast-track systems for refund of withholding taxes become as effective as possible while reducing the costs and demands for IT solutions. They will also work on ensuring a fair deadline to have the directive implemented. Before making further comments on the draft directive, the Danish parliament wishes to assess the financial consequences for the Danish state.

The Swedish government welcomes the efforts aimed at facilitating the elimination of double taxation and promoting cross-border investments in the EU. The proposed EU-wide procedures for withholding tax can simplify the handling for both investors and financial intermediaries, thereby reducing the administrative burden. At the same time, a reporting obligation system can improve tax authorities' abilities to detect abuse. Therefore, on an overarching level, the Swedish government is positive towards the proposal.