The European Commission has proposed rules to make withholding tax procedures in the EU more “efficient and secure” for investors, financial intermediaries and member state tax administrations.
The changes – a key element of the Communication on Business Taxation for the 21st Century, and the Commission’s 2020 Action Plan on the Capital Markets Union – will promote fairer taxation, fight tax fraud, and support cross-border investment throughout the EU.
The term “withholding tax” refers, for example, to the situation where an investor resident in one EU member state is liable to pay tax on the interest or dividends earned in another member state. This is often the case for cross-border investors.
In such a scenario, in order to avoid double taxation, many EU member states have signed double taxation treaties, which avoid the same individual or company being taxed twice. These treaties allow a cross-border investor to submit a refund claim for any excess tax paid in another member state.
The EU said: The problem is that these refund procedures are often lengthy, costly and cumbersome, causing frustration for investors and discouraging cross-border investment within and into the EU.
“Currently, the withholding tax procedures applied in each member state are very different. Investors have to deal with more than 450 different forms across the EU, most of which are only available in national languages.
“The Cum/Ex and Cum/Cum scandals have also shown how refund procedures can be abused: the tax losses from these practices have been estimated at €150bn (£128bn, $164bn) for the years 2000-2020.”
Key actions proposed today will make “life easier” for investors, financial intermediaries and national tax authorities and they include:
- A common EU digital tax residence certificate – which will make withholding tax relief procedures faster and more efficient. For example, investors with a diversified portfolio in the EU will need only one digital tax residence certificate to reclaim several refunds during the same calendar year. The digital tax residence certificate should be issued within one working day after the submission of a request. At present, most member states still rely on paper-based procedures;
- Two fast-track procedures complementing the existing standard refund procedure – which will be a “relief at source” procedure and a “quick refund” system, which will make the relief process faster and more harmonised across the EU. Member states will be able to choose which one to use – including a combination of both; and
- A standardised reporting obligation – which will provide national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse. Certified financial intermediaries will have to report the payment of dividends or interest to the relevant tax administration so that the latter can trace the transaction.
The proposal should come into force on 1 January 2027.
Mairead McGuinness, EU commissioner for financial services, financial stability and capital markets, said: Disjointed and largely paper-based tax procedures are costly and they stifle investment across the Single Market. Retail investors are impacted most, as 70% of them do not reclaim the tax refund to which they are entitled.
“Besides fighting tax fraud, this proposal eases the burden of claiming back tax by cutting red-tape and making the process simpler and faster, both for investors and tax authorities. This proposal removes an obstacle to creating a single market for capital – and in doing so makes an important contribution to capital markets union.”
This comes several weeks after the EC published its retail investment package in a bid to “empower” retail investors.