CE initiative to avoid double taxation on dividends and interest. What are the implications?

Over time, the European Commission has identified a major deficiency in the capital market at the EU level concerning the taxation of dividends and bond interest in member states. In response, the institution has launched the FASTER initiative (Faster And Safer Taxation Excess Relief), in the form of a directive project, aiming to simplify the mechanism so that investors can benefit from more favorable conditions when earning income from dividends or interest from such instruments.

by Daniel Grigore, Senior Manager for Direct Taxation at Deloitte Romania

The new regulation primarily proposes a fast-track procedure for issuing tax residence certificates, easier access to facilities provided by existing regulations (treaties and directives), and simplified formalities for reclaiming withheld taxes on dividends and interest, where applicable.

Simplification of tax residence certificate issuance:

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In this context, the concept of an electronic tax residence certificate (eCRF) with a standardized format and simplified issuance procedures within a maximum of one working day comes into play. The eCRF will be valid for the entire year, regardless of the issuance date.

This move will reduce the administrative burden for companies making recurring payments subject to withholding tax.

New registration and reporting obligations for financial intermediaries:

The project also aims to introduce comprehensive registration and reporting obligations for financial intermediaries seeking FASTER certification to comply with Common Reporting Standards (CRS). While financial intermediaries will undergo additional procedures in the initial phase, aligning with other reporting standards in the long term will benefit all market participants by streamlining the procedures for tax reclaims or withholding tax exemptions.

Additionally, the commission’s proposal introduces a new aspect regarding reporting obligations for financial intermediaries. They will be required to promptly report information to authorities concerning their clients receiving interest and dividends from traded instruments on authorized markets, as banks currently do.

Benefits for intermediaries and their clients:

Financial intermediaries certified under FASTER will enjoy priority procedures for reducing and/or reclaiming withholding taxes for their clients. On the other hand, they will be responsible for verifying their clients’ tax residence, ensuring their eligibility for tax reductions (according to double taxation avoidance treaties or national legislation), and for tax refunds. For this purpose, intermediaries must collect documents that prove their clients’ status as beneficial owners of dividend and/or interest flows from traded instruments and carefully monitor acquisition dates relative to ex-dividend dates.

According to the project, clients of these financial intermediaries will benefit from tax refunds (through a regularization procedure) within 25 working days of the request, whereas currently, this operation can take months or even years, depending on the jurisdictions involved. It’s worth noting that the introduction of the fast refund procedure does not exclude the option for beneficiaries of interest and dividends from publicly traded instruments to directly request the regular refund procedure from relevant tax authorities.

Implementation timeline:

The FASTER proposal is currently under public debate and may undergo changes before becoming a directive and subsequently national legislation in each member state. In its current form, the project stipulates that member states must transpose the directive into national law by December 31, 2026, with application from January 1, 2027.

Until that time, financial intermediaries should decide to what extent they intend to certify under the new regulation (especially considering competitiveness) and ensure the preparation of their personnel with the necessary knowledge for conducting due diligence procedures (tax residency, substantial and formal conditions related to the application of double taxation avoidance treaties, reductions, and exemptions applicable according to the internal legislation of each member state). Additionally, they must prepare due diligence procedures (including GAP analysis / anti-money laundering – AML – or know-your-customer – KYC – procedures, documentation models, IT system settings, etc.).

In conclusion, the new legislative proposal supports investors from all EU member states with simplified registration and regularization procedures for withholding taxes on income from dividends and interest, while also imposing additional obligations on entities involved in such transactions.