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The European Commission has launched a public consultation on its proposal to introduce a new common EU-wide system of withholding tax on dividends or interest payments. The comment period will end on June 26, 2022.
Under the current system, when an EU resident makes an investment in securities in another EU Member State, the home country will normally impose a withholding tax on dividends or interest on securities at a rate often higher than the reduced rate provided for by 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 time-consuming, resource-intensive and costly for both investors and tax administrations due to the lack of digitized procedures and the existence of complex and divergent forms in EU Member States.
In addition, the European Commission specifically notes that the current procedures can be subject to abuse, as recently shown by the existence of an alleged large-scale tax evasion known as the “Cum/Ex” scheme and ” Cum/Cum” in some EU member states, such as Germany.
The European Commission is considering three options (or a combination of these three options) to solve the problems identified above.
Option 1: Improved withholding tax repayment procedures
This option involves simplifying and streamlining the withholding tax refund procedures applied by the different EU Member States by implementing measures that make these procedures faster and more transparent. These may include:
- establishing common EU standardized forms and procedures for withholding tax refund claims, regardless of the EU Member State concerned; and
- the requirement to digitize current paper-based relief processes.
Several mechanisms at EU level are also envisaged, such as:
- a central repository at EU level to store certificates of tax residence issued by the tax administrations of the Member States; and
- establishing a one-stop-shop where an investor could log in and submit a redemption request, regardless of the home Member State, on the basis of standardized forms.
The European Commission is also considering whether financial intermediaries should have the possibility to make the redemption request on behalf of the non-resident investor. If so, whether these financial intermediaries should be held liable for under-reporting to the source country will also need to be considered.
Option 2: Establish a fully-fledged common European relief To the source system
This option involves the implementation of an EU-wide standardized system for exemption from withholding tax, where the correct rate of withholding tax, as provided for in the applicable double taxation, is applied at the time of payment by the issuer of the security to the resident non-investor.
Under this option, it is expected that financial intermediaries will be required to verify the identification of non-resident investors and report relevant information on the correct withholding tax rate to the withholding and tax authorities.
The European Commission is examining whether only cross-border investors from EU Member States can benefit from this exemption at source system and whether only EU financial intermediaries will have these reporting obligations.
The European Commission is also examining whether these financial intermediaries should be liable for any under-declaration of withholding tax or whether these financial intermediaries should only be liable where they have not taken all reasonable steps to properly verify the right to the investor to the benefit of the tax treaty.
Option 3: Improve the existing administrative cooperation framework to verify entitlement to double tax treaty benefits
This option contemplates mandatory reporting and subsequent exchange of beneficial ownership information on an automated basis to reassure both the country of residence and the country of origin that the correct level of taxation has been applied to the investor. non-resident.
The European Commission is examining whether the current administrative cooperation framework in the EU (based on DAC2) should be extended to include the automatic exchange of additional financial information related to dividends or interest payments received. The European Commission is considering whether this should be implemented as a new reporting element of the already standardized process under the Common Reporting Standard (CRS) and DAC2 or under another separate mechanism.
Furthermore, the European Commission notes that DAC2 already requires the declaration of the amount of the dividend received on the holder’s account. Conversely, the DAC2 does not include additional data relevant to the correct control of reimbursement/exemption procedures (for example, withholding agent, intermediaries in the financial chain, gross dividend paid, payment date, etc.). The European Commission is examining whether the following information must be communicated: the identification information and conventional residence status of the beneficial owners of the income paid, as well as the nature and amount of the income received by these investors.
Substantial changes to national withholding tax rules?
Although the options above are framed as “procedural modifications” to withholding tax recovery systems, the standardization involved in options 1 and 2 may imply that certain fundamental underlying rules, such as the question of “beneficial ownership”, should be defined. at EU level rather than at national level. This is particularly the case when one of the aims of this European Commission project is to tackle alleged tax abuses, such as the ‘Cum/Ex’ scheme and the ‘Cum/Cum’ schemes.
Although this project aims to improve the efficiency of the withholding tax recovery procedure, the options considered by the European Commission could bring about significant changes to these procedures (and possibly to the substantive withholding tax rules). source) and could impose additional reporting obligations on investors and/or financial intermediaries. . Therefore, stakeholders should pay continued attention to developments in this area. The consultation will end on June 26, 2022. It is expected that any recommendations will be presented in the fourth quarter of 2022.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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