On May 14th 2024, the ECOFIN council reached an agreement on the FASTER directive (Faster and Safer Relief of Excess Withholding Taxes), aiming to encourage cross-border investments by facilitating procedures to recover withholding taxes and reduce tax rates when appropriate, while providing new tools for Member States to better fight against tax fraud.
In this edition, Globe Refund navigates with you the impact of this directive, which should be transposed on January 1st 2030. While the impact will be positive for investors, the directive comes with numerous conditions that fund managers should be aware of.
Whether your investment funds request the application of reduced rates, relief at source, or quick refunds, they must be handled by a CFI where the securities are held or managed.
To achieve this, the relevant IFC will need to obtain a declaration from the registered owner. This declaration should specify, when required, that the owner is the beneficial owner of the income according to the state's national legislation or a tax treaty it has signed.
Additionally, it should state whether there is any financial agreement related to the underlying listed stock. Furthermore, the IFC must verify the registered owner's eligibility for the claimed reduced withholding tax rate, ensuring this verification is based on the information available.
It is worth noting that IFCs could be prohibited from any facilitation procedures if they have committed any offenses, including those leading to a loss of withholding tax at source. Therefore, it is crucial for your investment funds to ensure that the IFC's reputation is reliable.
The Directive proposes a standardized reporting requirement to provide tax authorities with the necessary tools to verify eligibility for reduced rates and detect potential abuses. Certified financial intermediaries will be required to report dividend and interest payments to the relevant tax authority, enabling the tracking of these transactions. This reporting must be completed within 25 days and include details about the payer and recipient, as well as additional information to help identify any abuses.
A primary goal of the FASTER initiative, as highlighted earlier, is to combat tax fraud. The Cum/Ex and Cum/Cum scandals illustrate the potential for abuse within current refund procedures, with tax losses from these practices estimated at €150 billion over the last two decades. CFIs will be required to report whether shares were acquired within two days of the ex-dividend date or if specific financial arrangements are in place regarding such equities. If either condition is met, eligibility for fast-track procedures will be waived, requiring adherence to existing national procedures for reclaiming excess withholding tax.
The FASTER directive is a welcome news for investors. Existing reclaim procedures are burdensome, time-consuming, and costly. This directive will streamline these procedures on a global scale. Currently, investors must choose the correct form from nearly 500 available options for the appropriate tax authorities.
However, new responsibilities will arise for CFIs, including compliance and reporting regulations. These new requirements might cost them nearly 100 million euros for implementation and between 10 and 20 million euros annually for recurring costs. Due to these challenges, it is uncertain whether all financial institutions will be able to obtain or maintain their CFI status.
Furthermore, while the directive is likely to simplify tax reclaim procedures under double tax treaties, procedures governed by the European Court of Justice will likely remain unchanged.
The proposed plan also presents challenges for complex cases, raising questions about the feasibility of investigating them in greater detail.
Further developments of the FASTER directive are expected before its transposition date on January, 1st, 2030. Globe Refund will closely monitor these changes and share their impacts to help you anticipate and preserve the growth of your funds' performance.
Our work focuses on providing outsourced withholding tax recovery services to safeguard your investments from over-taxation and save your time from burdensome processes.
