The FASTER Directive is approaching: Major changes to the Settlement of Withholding Tax (WHT)
14 June 2024
The FASTER Directive on Withholding Tax (WHT)
The European Union aims to simplify and speed up the procedures related to withholding tax relief in order to increase the efficiency of EU capital markets. The new initiative provides for the introduction of two mechanisms: withholding tax relief and a quick refund system for overpaid taxes.
The term “withholding tax” (WHT) refers to flat-rate income taxes (for individuals and entities) levied on taxpayers resident or established in the country where the income is earned. Withholding tax is thus a special form of tax levied on cross-border payments for certain intangible services, royalties, interest, and dividends.
On May 14, 2024, the European Commission reached an agreement on the FASTER directive which concerns faster and safer deduction of overpaid WHT on passive income. This means that the June 2023 directive and related regulations are closer to entering into force. They will affect, among other things, the legal and tax situations of cross-border investors, national tax authorities, and financial intermediaries such as banks or investment platforms.
What is the FASTER Directive and how does It change WHT Settlements?
Withholding Tax and the FASTER Directive
Cross-border transactions entail the risk of double taxation in the taxpayer’s country and the payer’s country. For non-resident investors, the procedure for non-payment or refund of withholding tax (WHT) is complicated and varies between EU member states.
The FASTER directive aims to increase the security and efficiency of WHT settlement procedures. The introduced regulations will cover passive payments, i.e., payments resulting from dividends and interests.
The introduction of a faster and safer withholding tax relief mechanism is a step towards simplifying and speeding up tax procedures and combating tax fraud within the EU. It is also intended to increase the effectiveness and safety of WHT procedures for investors, financial intermediaries, and governments when making cross-border investments.
The directive also provides for a reporting obligation for financial intermediaries (e.g., banks, investment platforms). For this purpose, member states will be required to set up special national registers.
The main Goals of the FASTER Directive include:
- Reducing the time to obtain withholding tax relief or refund (WHT)
- Facilitating cross-border investments
- Increasing transparency, efficiency and effectiveness of WHT procedures
- Preventing tax fraud
- Positive impact on the economy including increasing GDP, wages, and employment.
Withholding Tax – Key Mechanisms under the FASTER Directive
The FASTER directive includes two key mechanisms for EU member states:
- RSS (Relief at Source System) – involves the collection of the correct tax amount at the time of dividend or interest payment by the company collecting the withholding tax.
- QRS (Quick Refund System) – in the event that higher tax rates are applied, the excess WHT will be refunded within a certain period of time, a maximum of 50 days from the date of the dividend or interest payment.
Benefits of implementing the FASTER Directive
The implementation of the FASTER directive is primarily intended to bring economic benefits. Reducing compliance costs and faster reimbursement of overpaid withholding tax will allow investors to reinvest funds more efficiently.
In addition, the FASTER directive aims to accelerate and digitize the process of claiming overpaid WHT refunds in the source country. An electronic tax residence certificate (eTRC) is to be introduced for both private and corporate investors. The certificate will be issued by the country of residence within 14 days of application and will be recognized throughout the European Union.
Increased transparency and control provided by the FASTER directive should also help prevent tax fraud and support economic growth by reducing costs for investors. It will also be beneficial for member states, which can increase the stability and competitiveness of EU capital markets through more efficient management of withholding tax (WHT) procedures.
When does the FASTER Directive come into force?
EU member states have until December 31, 2028, to adapt their national WHT legislation to the provisions of the FASTER directive. The new provisions of the FASTER directive will come into force on January 1, 2030.
getsix® – Professional Tax Advisory
getsix® experts offer tax advice at every stage of business operations and financial accounting. We also advise on the application of existing withholding tax exemption and refund procedures. We are ready to help you implement and define changes that will be affected by the FASTER directive in the area of WHT accounting.
If you have any further questions or require additional information, please contact your business relationship person or use the enquiry form on the HLB Poland website.
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