The Faster Directive
The Faster Directive, which is currently being drafted by the European Commission, includes provisions for a procedure to provide relief from excessive withholding tax that may be levied by a Member State on dividends from publicly traded shares and, where applicable, interest on bonds publicly traded and paid to registered owners who are tax resident outside that Member State.
Excessive withholding tax
The draft Directive indicates that "excessive withholding tax" is to be understood as the difference between the amount of withholding tax levied by a member state on payments of dividends or interest on securities to non-resident owners at the general domestic rate and the lower amount of withholding tax applied in accordance with a double tax treaty or specific national legislation (reduced rate or exemption provided by CIT or double tax treaty rules).
Important: It appears that the provisions of the Directive will have a limited scope and will be primarily relevant for investors investing in publicly traded companies and securities.
Selected changes for everyone: tax residence certificates
Some of the changes to be introduced by the Directive may apply to all taxpayers, not just participants in regulated trading. The published draft proposal envisions the establishment of a common digital tax residence certificate. Digital tax residence certificates are to contain uniform content, irrespective of the issuing Member State, i.e., the Member State of tax residence.
The draft indicates that Chapter II of the Directive (on digital tax residence certificates) applies to all Member States for all persons who are residents in their jurisdiction for tax purposes. It seems reasonable to expect the establishment of a common digital tax residence certificate of residency as a general mechanism that would also apply to, among other things, royalty payments or payments made outside the public trade.
Issuing tax residence certificate
The proposed regulations assume that Member States will be obliged to issue a digital tax residence certificate within one day, provided that they receive a specific set of information and provided that there are no exceptional circumstances justifying the delay.
Given the significant differences in form and content found in certificates of residence issued by different EU member states, the move to standardize the form, content and rules for issuing certificates of residence at the EU level and shorten the period for interested entities to obtain them should be seen as positive.
Financial market will be more regulated
The proposal also includes the establishment of a national register of certified financial intermediaries. In order to take advantage of the withholding tax relief procedures underlying the directive, investors will need to be able to work with financial intermediaries certified to provide these services. The directive also defines the conditions for registration, registration procedures and deletion from the register of certified financial intermediaries (CFIs).
Certified financial intermediaries will be subject to specific reporting obligations. In the Directive proposal, it is specified that the information provided to the tax authorities should enable the determination of the ultimate investor's identity and their potential eligibility for a reduced withholding tax rate at the source.
The Directive through the eyes of KR Group expert
Łukasz Kempa, Tax Director
In our opinion, there is a risk that the addition of another entity to handle withholding tax and the need to meet certain requirements to be recognized as a certified financial intermediary may make the whole process more difficult, prolonged and expensive (especially considering the above-standard requirements regarding the "real owner" criterion and the conduct of "real economic activity" presented by the Polish tax administration and presented, among others, in the Ministry of Finance's draft clarifications of September 25, 2023 regarding withholding tax collection).
WHT relief systems
The proposal provides for two withholding tax relief systems, i.e., the withholding allowance system and the prompt refund system.
Under the withholding relief system, the correct amount of tax is to be calculated by the withholding agent at the time of dividend/interest payment. The reduced tax rate or tax exemption is thus to be applied directly at the time of payment.
Under the quick refund system, tax is to be withheld at the higher rate applicable in the source country, but the excess tax is then refunded within a set time frame of a maximum of 25 days from the date of submission of the application or from the date of compliance with the reporting obligation, whichever of these dates is the later. This should take place within 50 calendar days from the date of payment.
Tomasz Śliwiński, Senior Tax Specialist
Both under the withholding tax relief system and under the quick refund system, the appropriate entities in the procedures would be CFIs acting on behalf of their investors. The idea of a 25day refund period can be considered very favorable; however, in our opinion, in the Polish context, without the creation of a comprehensive list of requirements for tax authorities to determine that due diligence by the payer has been observed and that the conditions for applying the preferential treatment are met, it is not very realistic.
The project assumes that Member States will be obliged to apply the provisions of the Directive from January 1,
