The European Commission has launched a public consultation on its proposal to introduce a new common EU-wide system for withholding tax on dividend or interest payments. The consultation period will end on 26 June 2022.
Under the current system, when an EU resident makes an investment in securities in another EU Member State, the source country will normally impose a withholding tax on the dividends or interest on the securities at a rate that is often higher than the reduced rate under the relevant double tax treaty. The investor will then need to submit a refund claim for the excess tax withheld by the source country. This procedure is often lengthy, resource-intensive and costly for both investors and tax administrations due to the lack of digitalised procedures and the existence of complex and divergent forms across the EU Member States.
Also, the European Commission specifically notes that the current procedures can be abused, as shown recently by the existence of an alleged large-scale tax fraud known as “Cum/Ex” scheme and “Cum/Cum” scheme in some EU Member States, such as Germany.
The European Commission is considering three options (or a combination of these three options) to tackle the problems identified above.
Option 1: Improving withholding tax refund procedures
This option entails the simplification and streamlining of the withholding tax refund procedures operated by individual EU Member States by implementing measures which make these procedures quicker and more transparent. These may include:
- the establishment of common EU standardised forms and procedures for withholding tax refund claims, irrespective of the EU Member States concerned; and
- the obligation to digitalise the current paper-based relief processes.
Several EU-level mechanisms are also being considered, such as:
- a central repository at EU level to store tax residence certificates issued by Member States’ tax administrations; and
- establishing a one-stop shop where an investor could log in and make a refund claim, irrespective of the source Member State, based on standardised forms.
The European Commission is also considering whether financial intermediaries should have the opportunity to make the refund claim on behalf of the non-resident investor. If so, then whether such financial intermediaries should be liable in case of any underreporting to the source country will also require consideration.
Option 2: Establishing a fully-fledged common EU relief at source system
This option entails the implementation of a standardised EU-wide system for withholding tax relief at source whereby the correct withholding tax rate, as provided in the relevant double tax treaty, is applied at the time of payment by the issuer of the security to the non-resident investor.
Under this option, the expectation is that financial intermediaries will be obliged to check the non-resident investors’ identification and to report the relevant information on the correct withholding tax rate to the withholding agent and the tax authorities.
The European Commission is considering whether only cross-border investors from EU Member States can benefit from this relief at source system and whether only EU financial intermediaries will have these reporting obligations.
The European Commission is also considering whether such financial intermediaries should be liable for any underreporting of withholding tax or whether such financial intermediaries should only be liable when they did not carry out all reasonable actions to properly verify the investor’s entitlement to the tax treaty benefit.
Option 3: Enhancing the existing administrative cooperation framework to verify entitlement to double tax convention benefits
This option envisages a reporting and subsequent mandatory exchange of beneficial owner-related information on an automated basis to reassure both the residence and source country that the correct level of taxation has been applied to the non-resident investor.
The European Commission is considering whether the current administrative cooperation framework in the EU (based on DAC2) should be broadened to include the automatic exchange of additional financial information related to the dividend or interest payments received. The European Commission is considering whether this should be implemented as a new reporting item of the already standardised process under the common reporting standard (the CRS) and DAC2 or as part of another separate mechanism.
Also, the European Commission notes that DAC2 already requires the reporting of the amount of the dividend received in the holder account. Conversely, DAC2 does not comprise any additional relevant data for the correct checking of refund/relief procedures (e.g., withholding agent, intermediaries in the financial chain, gross dividend paid, date of payment, etc.). The European Commission is considering whether the following information should be reported: the identification information and treaty residence status of the beneficial owners of the income paid and the nature and amount of income earned by those investors.
Substantive changes to the national withholding tax rules?
Although the above options are phrased as “procedural changes” to the withholding tax reclaim systems, the standardisation entailed in options 1 and 2 may imply that certain fundamental underlying rules, such as the question of “beneficial ownership,” would need to be set out at the EU level, rather than at the national level. This is particularly the case when one of the European Commission’s goals of this project is to tackle alleged tax abuses, such as the “Cum/Ex” scheme and the “Cum/Cum” schemes.
Although this project aims to improve efficiency in the withholding tax reclaim procedure, the options considered by the European Commission may bring significant changes in these procedures (and possibly the substantive withholding tax rules) and may impose further reporting obligations on investors and/or financial intermediaries. Therefore, stakeholders should pay continuing attention to the developments in this area. The consultation will end on 26 June 2022. It is envisaged that any recommendations would be put forward in the fourth quarter of 2022.