Several tax measures have been introduced, potentially impacting taxpayers with operations in Luxembourg. The following newsflash summarises the most important developments.
EU
- FASTER proposal: EU Commission issues draft directive on faster and safer relief of excess withholding taxes (p. 1)
LUXEMBOURG
- Amendments to the investment tax credit rules (p. 4)
- Bill of law revising the fund laws, including provisions on subscription tax passed (p. 6)
- Bill of law approving the new double tax treaty between Luxembourg and the United Kingdom passed (p. 7)
- Bill of law implementing public country-by-country reporting measures passed (p. 8)
EU – FASTER proposal: EU Commission issues draft directive on faster and safer relief of excess withholding taxes
On 19 June 2023, the EU Commission proposed new rules to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and Member State tax authorities.
Withholding tax relief procedures in the EU are often seen as burdensome, costly and lengthy, and can also be abused, as illustrated by the so-called "Cum/Cum" and "Cum/Ex" cases. With this context, the EU Commission issued a proposal on 19 June 2023 for a Council Directive on faster and safer relief of excess withholding taxes (the "FASTER Proposal"). The objective of the proposal is twofold:
- Facilitate cross-border investment by putting in place a common framework across the Member States for the relief of excess taxes withheld at source on dividends from publicly traded shares (non-listed shares are thus out of scope), and, where applicable, on interest from publicly traded bonds.
- Ensure fair taxation by providing Member State tax authorities with the information required to check eligibility for a reduced withholding tax rate and ensure that withholding tax refunds are granted correctly, preventing tax fraud and abuse.
The proposed measures are summarised below.
Withholding tax relief procedures to be implemented by Member States
Member States will be able to choose which of the following withholding tax relief procedures they implement (including a combination of both):
- Relief at source system under which the tax rate applied at the time of payment of dividends or interest is directly based on the applicable provisions of the relevant tax treaty or domestic law provisions.
- Quick refund system under which the refund of excess withholding tax is requested and processed within 50 calendar days from the payment date.
No relief will be provided in certain (abusive) cases, e.g., where the dividend is derived from shares acquired within two days before the ex-dividend date, or where the dividend is linked to a financial arrangement that has not been settled at the ex-dividend date.
Where the requirements for applying the above withholding tax relief procedures are not met, Member States will apply their existing standard refund procedures to relieve excess withholding taxes. In this case, the investor will have to provide relevant information to the tax authorities regarding the non- application of anti-abuse measures, unless the total dividend paid does not exceed EUR 1,000.
Who will request relief?
The CFI which maintains the investment account of an investor (referred to as the registered owner) receiving dividends or interest will request the relief on behalf of the registered owner, provided they have authorised the CFI to do this and the CFI has verified and established the investor's eligibility for a relief procedure (due diligence obligations).
Registration requirements for CFIs
Certain large EU financial intermediaries and central securities depositories will be required to register as CFIs in the new national register of every Member State where securities issuers are located and where any of their clients have invested.
Other entities acting as financial intermediaries and meeting specific requirements, including those established in a third country jurisdiction, will also be able to join the national registers on a voluntary basis.
In practice, this means that investors will have to deal with financial intermediaries that are registered CFIs in order to benefit from the new withholding tax relief procedures.
Non-compliant CFIs will be subject to removal from the national register(s).
Reporting requirements for CFIs
CFIs will have to report information (in xml format) to the competent authority maintaining the national register in the relevant Member State(s). This includes information about:
- The recipient and the payor of the dividend or interest payment, including name, TIN and investment account number.
- The dividend or interest payment, including relevant dates, gross and net amounts, withholding tax rate applied and account number of the recepient.
- The non-application of anti-abuse measures, including holding period of underlying shares and financial arrangements not settled at the ex-dividend date.
Reporting must take place as soon as possible after the record date and within 25 days of the record date at the latest.
No reporting will be required if the total dividend paid to the registered owner does not exceed EUR 1,000.
CFIs due diligence obligations
CFIs must have adequate procedures in place to perform the relevant verifications. They will have to obtain a confirmation from the registered owner that they are the beneficial owner of the dividend or interest, and that they have not engaged in abusive financial arrangements linked to the underlying publicly traded shares. In addition, CFIs must verify, inter alia, the digital tax residence certificate ("eTRC") or appropriate proof of tax residence of the registered owner, and the registered owner's entitlement to a specific reduced withholding tax rate.
The eTRC is a digital process to be introduced by all Member States which aims to confirm EU taxpayers' tax residence. The eTRC will be issued within one working day of submitting a request (if the required information has been provided) and will in principle be valid for at least one whole calendar year.
Information to be provided by CFIs under withholding tax relief procedures
Under the relief at source system, CFIs will have to inform the withholding agent of the tax residence of the registered owner and the applicable withholding tax rate.
Under the quick refund system, CFIs will have to provide the relevant Member State with (i) the identification of the dividend or interest payment, (ii) the legal basis of the applicable withholding tax rate and the total amount of excess tax to be refunded, (iii) the tax residence of the registered owner, and (iv) the registered owner's declaration.
Sanctions
Non-compliant CFIs may be subject to penalties imposed by the relevant Member State. In addition, CFIs could be held liable for tax revenue losses incurred due to the inadequate fulfilment of their reporting or due diligence obligations, to the extent provided for under the national law of the Member State where the loss is incurred.
Next steps
The FASTER Proposal will now follow the normal legislative process at EU level.
If adopted, the FASTER measures will have to be implemented into Member States' national law by 31 December 2026 and will apply from 1 January 2027. This gives financial intermediaries time to prepare for the implementation of new processes or the adaptation of existing ones in order to comply with their future registration, due diligence and reporting obligations.
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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.
