1. Executive summary
If the proposed rules are adopted, Member States will be obligated to introduce at least one of the following systems:
- A relief at source procedure (“RSP”) – meaning that the tax rate applied at the moment of payment is based on the applicable tax treaty; and/or,
- A quick refund procedure (“QRP”) – the refund of the withholding tax paid is granted within 50 days from the date of payment.
In order to prove that a recipient is a tax resident of a certain jurisdiction, a certificate of residence is required. This is already the case today, but the procedures for obtaining such a certificate vary per Member State and can be time consuming. The proposed rules introduce a common EU digital tax residence certificate, which should be issued in one working day after the request has been filed.
Finally, a common reporting obligation is introduced which should ensure that Member States can detect potential abuse. This obligation should be fulfilled by financial intermediaries.
2. The rules of the Directive
2.1 The two procedures
According to the proposal, Member States have the authority to determine whether they want to include option 1, 2 or both. In addition, each Member State has the discretion to apply the RSP to a certain type of taxpayer (for instance low-risk) and the QRP to other types.
The RSP has the effect that the withholding tax paid should correspond with the applicable tax rate permitted under national law as well as under the applicable tax treaty.
With the QRP, first the amount of withholding tax paid is based on domestic laws. Subsequently a refund is provided if the amount of withholding tax permitted under the tax treaty is lower than the amount of withholding tax paid. Only the excess amount of withholding tax paid will be refunded.
2.2 Digital tax residence certificate
Member States will be obligated to issue digital tax residency certificates with common content and format. Such information includes the name of the individual or entity, the tax identification number, the address of the taxpayer etc. It is proposed that the certificate covers at least a full calendar year, but a certificate is deemed invalid if the facts and circumstances mentioned on the certificate do not correspond with reality. Member States are allowed to issue certificates for a longer period and shall recognize the certificates from other Member States as adequate proof for the tax residency.
In principle, Member States are required to issue a tax residency certificate within one day to the extent that all required information is provided and no exceptional circumstances justify a delay. In respect of this tight deadline, Member States are required to set up a fully automated system.
2.3 Common Reporting
The idea behind the common reporting standard is threefold:
- It provides Member States with the information which is required to apply the relief/refund procedure;
- It provides Member States with the information which is required to assess whether anti-abuse provision should apply;
- It should reduce compliance costs and create swifter withholding tax procedures.
The common reporting has to be filed by certified financial intermediaries to the tax authorities. Such intermediaries (both EU or non-EU) will have to join a national register. If a Member State does not have such national register, it is obligated to incorporate it.
The financial intermediaries are obligated to report only the part of the transactions that are visible to them. This includes:
- basic information on the recipient of the dividends or interest;
- basic information on the payer of the dividends or interest;
- information on the dividend or interest payment; and,
- information on the application of anti-abuse measures.
3. Other remarks
Member States are obligated to include rules on penalties pursuant to infringements or non-compliance with the ultimately incorporated national rules of this Directive (if accepted). These penalties must be effective, proportionate and dissuasive.
Member States are also obligated to include late payment interest provisions if the refund is not paid within the proposed timelines.
4. Take aways
This is currently just a proposal. Once accepted, the rules should be incorporated into national law. According to the proposal, the rules should come into force as of 1 January 2027.
We see major benefits for taxpayers, as it would simplify procedures throughout the EU. However, the compliance burden for financial intermediaries will be increased and financial intermediaries should provide information on the application of anti-abuse regulations, in respect of which they might lack detailed knowledge or expertise.
Finally, with regard to the penalties, we note that the proposal provides insufficient guidance. Similar articles in other Directives resulted in major differences for penalties between Member States. For instance, since the implementation of the fifth amendment to the mandatory disclosure directive (DAC6) in 2020 the penalty for not meeting reporting requirements under German law amounts to a maximum of € 25,000 while in Poland it amounts to a maximum of € 5,800,000. This does not create a level playing field that the Commission strives for and the single market requires.