Burdensome procedures for withholding tax have long been identified as a barrier to achieving a single European securities market because they disrupt financial processes and increase the cost of cross-border trading, undermining investment within the EU. The Action Plan of the EU Commission for fair and simple taxation supporting the recovery strategy aims at introducing a common, standardised EU-wide system for withholding tax relief at source coupled with a new exchange of information and cooperation mechanism between administrations.
According to the EU Commission, inefficient and particularly burdensome withholding tax relief procedures represent significant tax barriers to cross-border investments in the securitiies market and the risk of tax abuse persists within the European Union. When an EU resident makes an investment in securities in another Member State, the payments received in return (dividends or interest) are normally subject to a withholding tax in the country of the investment (source country), at a rate which is often higher than the reduced rate on the basis of an applicable bilateral Double Taxation Convention (DTC). Where this applies, in order to eliminate the double taxation, the nonresident investor is then required to submit ex-post a refund claim of the excess tax withheld by the source country. The current procedures can be abused as shown recently by an investigation carried out by a consortium of investigative journalists that reported the existence of an alleged large-scale tax fraud known as “Cum/Ex” scheme and subsequent “Cum/Cum” Scheme in some EU Member States. In addition, such withholding tax relief mechanisms for cross-border payments have proved to be lengthy, resource-intensive and costly for both investors and tax administrations due to the lack of digitalized procedures and the existence of complex and divergent forms across Member States. In some cases, these high costs drive non-resident taxpayers to forego their right to apply for the tax treaty benefits that they are entitled to, thereby leading to double taxation and as a consequence to less attractive net returns than for domestic investments. The existence of inefficient, burdensome and costly procedures for the recovery of excess tax paid in a cross-border context discourages cross-border investment in the Union.
In the aftermath of the Covid-19 crisis, the goal of streamlining the withholding tax relief procedures will be even more important for the economic recovery, as there is a strong need for investment (private as well as public) throughout the EU.
The EU Commission aims at making withholding tax relief procedures for non-resident investors more efficient and of increasing the ability of tax administrations, to identify and target investors that abuse rights granted under DTC’s. The baseline scenario used as a benchmark will consider that the current legislative rules and national administrative practices on withholding tax relief procedures remain unchanged. The Commission will consider policy options, including legislation, to achieve the before-mentioned objectives while adhering to the principle of proportionality. A range of policy options (or a combination of them, if it is deemed appropriate) might include the following ones:
a) Improving withholding tax refund procedures to make them more efficient. This option entails the implementation of several measures, the objective of which is to simplify and streamline withholding tax refund procedures by making them quicker and more transparent.. These measures are not limited by but could include: the establishment of common EU standardised forms and procedures for withholding tax refund claims irrespective of the Member States concerned and the obligation to digitalise current paper based relief processes.
b) Establishment of a fully-fledged common EU relief at source system. This option entails the implementation of a standardized EU-wide system for withholding tax relief at source whereby the correct withholding tax rate, as provided in the DTC is applied at the time of payment by the issuer of the security, to the non-resident investor thereby not incurring double taxation.
c) Enhancing the existing administrative cooperation framework to verify entitlement to double tax convention 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 initiative will mainly affect cross-border portfolio investors7 , tax administrations and intermediaries. The main impact of this intervention will be to improve the allocation of investment within the European Union and on the Member States’ tax revenues by making the EU capital market more efficient and the economy more productive. EU competitiveness should be enhanced by a better functioning of the Single Market, which would become more attractive for investors and will boost investment volumes in the EU. Higher investment would underpin the higher growth of companies and of the economy in general. This will translate into higher tax revenues on a larger tax base. In the case of the introduction of stronger cooperation rules between tax authorities and reporting obligations to tax administrations, the latter will have more tools to verify that non-resident investors pay their fair share and that withholding tax relief claims are not subject to abuse.
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