Council Of The EU Agrees On Draft Proposal For The FASTER Directive

On 14 May 2024, the Council of the EU reached a political agreement on a compromise text of the proposed Directive on faster and safer relief of excess withholding taxes (FASTER Directive). The FASTER Directive intends to significantly improve efficiency and legal certainty in certain withholding tax (WHT) relief procedures in EU capital markets. In the 14 May ECOFIN meeting, key issues were resolved, and several important amendments were approved, with the compromise text now ready for re-consultation with the European Parliament. The implementation was delayed: once formally approved by the Council, Member states would have to implement the FASTER Directive by 31 December 2028 and apply its provisions as from 1 January 2030.

High-level overview of the FASTER Directive

The proposed FASTER Directive introduces a unified framework for WHT relief procedures for dividends and interest on publicly traded instruments. Its core objectives are making WHT relief processes faster and more efficient as well as preventing tax fraud and abuse. Based on the current compromise text of the FASTER Directive, four core elements can be outlined:

1. Quick relief systems: Member states must introduce either a relief at source system resulting in withholding the correct amount of WHT or a quick refund system resulting in the refund of excess WHT within fifty calendar days.
2. National registers for Certified Financial Intermediaries (CFIs): Large institutions and central securities depositaries, which facilitate WHT relief procedures, will be included in national registers as CFIs. Other entities can register voluntarily.
3. Standardised reporting obligations: CFIs will report essential information to competent authorities to identify investors, the entitlement to reduced WHT rates and potentially abusive WHT avoidance schemes. It is intended to provide tax authorities visibility of the financial chain and investor's reclaim eligibility.
4. EU tax residence certificate: The directive introduces a common EU digital tax residence certificate (eTRC) that investors can use in order to benefit from the FASTER relief procedures. Member states must provide a quick and automated process to issue eTRCs to investors resident in the respective jurisdiction.

See also our previous website post for more background information.

Key changes approved during 14 May 2024 ECOFIN Meeting

• Market capitalisation ratio criterion: Member states with a national financial market capitalization representing less than 1.5% of the overall EU market capitalisation, may be exempt from applying the directive's quick relief systems and registration and reporting of CFIs, if a comprehensive relief-at-source system is already in place in that jurisdiction. The scope exemption does not extend to implementation of the eTRC.
• Exclusions from fast-track procedures: Provisions were added to exclude certain high-risk cases from fast-track procedures based on gross dividend payment thresholds and financial arrangements. Member states may exclude requests for relief under specific conditions, such as short-term ownership of securities. Specifically, Member states can exclude from fast-track procedures dividends paid on shares acquired within five days before the ex-dividend date, dividends linked to unsettled financial arrangements, and cases involving non-certified intermediaries. Additionally, dividends exceeding EUR 100,000 per registered owner per payment date, except for large regulated collective investment undertakings and certain pension funds, can also be excluded.
• Relaxed timing for issuance and restricted validity of eTRC: The requirement for automated issuance of eTRCs within one working day has been extended to 14 calendar days. Additionally, the directive now provides that the certificate validity is limited to one calendar year.
• Late payment interest: The FASTER Directive directs member states to apply interest at a rate equal to the interest already applied to late payments of tax repayments – if national legislation includes such compensation provisions at all. Initially, the interest rate was based on an EU reference rate plus 50 basis points.
• Amended scope of reporting and due diligence: The scope of information to be reported by CFIs and their due diligence procedures have been amended, particularly involving CFI's declaring that investors are entitled to relief and indeed is the beneficial owner. The simplified processes and requirements for small investors, specifically a EUR 1,000 threshold rule, have been eliminated.
• Liability and personal data protection: Adjustments were made to liability provisions clarifying that CFIs can be held liable for withholding tax revenue losses due to (full or partial) non-compliance with obligations. Additionally, personal data protection measures were enhanced to ensure compliance with GDPR, to safeguard taxpayer interests and limiting data retention terms.
• Special provisions for indirect investments: In certain investment structures, including UCITS and AIF structures, the registered owner may not be the person entitled to the relief on account of a certain tax treatment in source states. The compromise text better accommodates 'indirect investments' via such Collective Investment Undertakings (CIUs).
• European CFI Portal: a central portal will help streamlining the registration process for CFIs across member states through a single entry point.

Key insights

• Crucial role of CFIs: The FASTER Directive imposes new and demanding compliance obligations on financial intermediaries and asset-servicing organizations, such as custodian banks. CFIs play a pivotal role in the FASTER Directive. They are required to implement due diligence procedures to assess investors' eligibility for tax relief, including collecting and verifying beneficial ownership declarations and tax residence declarations. They must also comply with enhanced reporting requirements and ensure transparency in their operations. Institutions included in the national registers on a mandatory basis should monitor developments and prepare their compliance strategy accordingly.
• Preparation for investors: It is advisable for investors to review their current WHT refund or reduction claim procedures and ensure their documentation is in order. Engaging with financial intermediaries to understand their readiness for the new systems and staying informed on legislative developments and implementation timelines is crucial. Consulting with tax advisers to understand the specific implications for their investments is also advisable.
• Relationship between investor and CFI: The FASTER Directive will likely intensify the relationship between investors and financial intermediaries, as intermediaries will play a critical role in obtaining tax relief. Investors will need to rely on their intermediaries to ensure compliance with the new requirements and to facilitate the WHT relief process.
• Adaptation challenges: While the FASTER Directive aims to streamline procedures, there may be initial challenges in adapting to the new systems and meeting the enhanced due diligence and reporting requirements. CFIs will face increased administrative burdens and potential liability risks. Investors might need to adjust to new documentation and verification processes, potentially increasing initial processing costs.
• Anti-abuse and fraud measures: The FASTER Directive incorporates anti-abuse measures aimed at preventing WHT fraud and abuse, including Cum/Ex and Cum/Cum schemes. These measures target distributions on publicly traded instruments that change ownership shortly before the ex-dividend date or are linked to financial arrangements.

Concluding remarks

The 14 May ECOFIN meeting's agreement on the FASTER Directive represents a crucial step towards a more integrated and efficient EU capital market and tax environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.