Consultation begins on a new EU-wide withholding tax system

The reform has been discussed by both the EC and the European Parliament for some time and in March 2022 the parliament passed a resolution requesting the EC to begin the legislative process.

Currently, when an EU resident makes an investment in securities in another Member State, the payments received in return as dividends or interest are normally subject to a withholding tax in the country of the investment (the source country). This rate is often higher than the reduced rate on the basis of an applicable bilateral double taxation treaty (DTT). In order to eliminate the double taxation, the non-resident investor then has to submit a claim for refund of the excess tax withheld by the source country.

According to the EC, this process has proved to be ‘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 Member States. Its complexity sometimes drives non-resident taxpayers to forego their right to apply for tax treaty benefits intended to reduce double taxation. They consequently receive less attractive net returns than they would for domestic investments, and are discouraged from making cross-border investments, the EC says. According to the EC, costs related to withholding tax refund procedures, foregone tax relief and opportunity costs were about EUR8.4 billion in 2016, the most recent year for which data is publicly available.

Moreover, the system is vulnerable to fraud, as shown by the so-called Cum/Ex and Cum/Cum schemes, in which multiple refunds were claimed from various EU governments in regard to cross-border payments and withholding taxes that never actually happened.

The EC’s paper proposes three possible alternatives. The first is to improve withholding tax refund procedures to make them more efficient, for example by establishing common EU-standardised forms and procedures for withholding tax refund claims irrespective of the Member States concerned. The process could also be made more efficient by requiring claims to be made electronically.

A second option is to establish a fully-fledged common EU system for relief at source, under which the correct DTT withholding tax rate is applied at the time of payment by the issuer of the security, so that the non-resident investor does not incur double taxation.

The third proposed alternative is to build on the EU's existing administrative cooperation framework in order to to verify an investor's entitlement to DTT 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 draft legislation's main aim is to remove barriers to cross-border investment, but it will also include a system for the exchange of information between tax authorities. The consultation is open until 24 June and the final legislation is expected be enacted in the fourth quarter of 2022.

Sources

• CFE Tax Advisers Europe
• EC
• European Parliament