Simplified procedures for claiming cross-border withholding tax relief – Frequently Asked Questions
European Commission - MEMO/09/462 19/10/2009
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Brussels, 19 October 2009
Simplified procedures for claiming cross-border withholding tax relief – Frequently Asked Questions
What is the recommendation designed to do?
The Recommendation aims to show EU Member States how they could simplify the procedures that they currently apply to verify investors' entitlement to relief from withholding tax on cross-border securities income. The objective is both to facilitate investors who wish to invest across borders and to ensure that EU-based financial intermediaries can provide services freely across borders, as they are entitled to do under Article 49 of the EC Treaty. The Recommendation also suggests ways in which Member States could ensure that the proposed simplifications would not open their tax bases to errors or fraud.
What is the scope of the Recommendation?
The Recommendation applies to withholding taxes levied on securities income (mainly dividends and interest) that is sourced in an EU Member State, and that is paid to EU resident investors, via one or more financial intermediaries established in the EU or in an EFTA country that provides for a level of administrative assistance to other countries equivalent to that applicable by EU Member States under EU legislation.
Why is the Recommendation necessary?
Under the bilateral double taxation treaties that EU Member States have with each other, Member States generally agree to reduce source country withholding taxes on securities income, in order to share taxing rights between the two treaty partner countries. Some Member States even apply a reduced withholding tax or exemption on securities income paid to foreign investors under their domestic law where certain conditions are met. However, the procedures to reduce the withholding tax rates at the payment stage or to claim refunds of tax withheld are often so complicated and varied that investors do not bother claiming relief or refunds and may even be discouraged from investing abroad.
How would the Recommendation benefit investors?
The recommendation would benefit investors in the first place because it suggests that Member States should apply at source (i.e. at the time of payment of the securities income), rather than by refund, any withholding tax relief to which an investor is entitled.
Second, in cases where investors are not able to obtain withholding tax relief at source , the recommendation encourages Member States to apply quicker and simpler tax refund procedures, including the following elements:
Explain in more detail what the Recommendation suggests with regard to certificates of residence
It can take tax authorities some time to issue formal certificates of residence to taxpayers and even then the certificates are usually time-limited in validity. This can make it difficult for taxpayers who wish to use these certificates to claim withholding tax relief from a tax authority of another Member State. The Recommendation therefore suggests that, for the purposes of claims for withholding tax relief, tax authorities should consider whether alternative proofs that the taxpayer is resident where he says he is resident would be acceptable and sufficiently risk-proof. Such alterative proofs could include self-certification by the investor and/or residence documentation gathered by financial intermediaries (sometimes referred to as "Know Your Customer" rules). For instance, when an investment firm provides investment advice and discretionary portfolio management to its clients, it is required under Article 19 (4) of the Market in Financial Instruments Directive 2004/39/EC of 21 April 2004 ( ) to obtain information about its clients/investors. The Recommendation suggests that tax authorities might, in particular, find these alternative proofs sufficient in the case of small claims, for example claims of less than €1,000.
How would the Recommendation benefit financial intermediaries?
The Recommendation proposes that Member States should allow foreign financial intermediaries to become involved in providing withholding tax relief services in the Single Market. Currently many Member States only allow resident financial intermediaries to provide such services. The Recommendation suggests that foreign financial intermediaries in a custody chain should, subject to authorisation by the source Member State, be allowed to take part in the relief procedures by acting as "withholding agents" or as "information agents". "Withholding agents" would be able to grant withholding tax relief at source by deducting the amount to be withheld. "Information agents" would provide information on the correct rate of withholding tax applicable to given investments up the custody chain so as to reach the withholding agent.
The Recommendation also suggests that financial intermediaries should only have to pass on "pooled" withholding tax rate information (i.e. information in a format which groups securities income according to the withholding tax rate applicable without identifying the owners of the securities) to the next financial intermediary in a custody chain. Providing information in a pooled format would lead to important savings for all parties concerned and would eliminate the competition and data protection concerns that financial intermediaries would have about passing client information to other financial intermediaries.
Would the Recommendation if implemented create administrative problems and tax revenue risks for Member States?
No, it should not do so.
First, the Recommendation should, if applied by Member States, lead to savings for tax administrations by reducing the administrative costs involved in processing refund applications and issuing certificates of residence.
Second, the Recommendation envisages that only authorised financial intermediaries should be able to take part in the simplified procedures. Member States could lay down conditions and obligations for the authorisation of financial intermediaries, such as, for example, making them liable for under-withholding of taxes. These conditions and obligations would, of course, have to be proportionate and non-discriminatory in order to allow foreign financial intermediaries to benefit fully from the freedom to provide services guaranteed under Article 49 of the EC Treaty. Member States may also withdraw authorisation from non-compliant financial intermediaries.
Third, the Recommendation suggests procedures that Member States could set up in order In order to monitor authorised financial intermediaries' compliance with their obligations (e.g. single or joint audits by the tax authorities of the source Member States, that of the Member States where the financial intermediary is established or by external auditors).
Fourth, while proposing the pooled information system described above so as to protect the commercial interests of financial intermediaries, the Recommendation also suggests a system to ensure that Member States have the information they need to know that the right rate of withholding tax was applied to all payments made from that country to investors in other EU Member States. The Recommendation proposes that, where there is a chain of financial intermediaries, the financial intermediary closest to the beneficial owner would be made responsible for reporting payments to that beneficial owner, annually or on request, to the source Member State.
How does the Commission intend to follow up on this recommendation?
The Commission suggests follow-up discussions with Member States in a Working Party, in order to examine in detail the ideas set out in the Recommendation and to consider other possible ways to improve withholding tax relief procedures.
The Commission may also launch further related initiatives at a later stage, notably in order to develop new channels of information exchange between Member States as well as to suggest common conditions and obligations, for example regarding liability for under-withholding of tax, to be met by authorised intermediaries. In addition, the Commission's proposals for improving mutual assistance in the tax area and mutual assistance in the recovery of taxes (COM/2009/28 and COM/2009/29) ( ), which are currently under discussion in the Council, should, if adopted by Member States, help to ensure that the simplifications suggested under the Recommendation do not lead to losses of tax revenues through evasion or error.
What is the origin of this initiative?
The problems with withholding tax relief procedures were first highlighted in 2001 by the Giovannini Group that advised the European Commission on financial market issues. The Group identified 15 barriers to the integration of EU securities post-trading systems, including the fact that financial intermediaries established within the EU were not allowed to offer withholding agent services in all of the Member States, which it listed as "Giovannini barrier 11". The EU Clearing and Settlement Fiscal Compliance Experts' Group (FISCO), that was created in March 2005 and met until 2006, had as one of its key issues the resolution of Giovannini Barrier 11. FISCO examined the withholding tax relief procedures in the various Member States and came up with suggestions on how to improve these procedures in a report in 2007 ( ) . These suggestions are reflected in the present recommendation that has been drawn up following lengthy consultations with Member States.
Over the past years there has been a growing interest in this topic, stimulated also by ongoing discussions at the Organisation for Economic Cooperation and Development (OECD) on improving procedures for tax relief for cross-border investors.
Are Member States likely to agree to follow the Recommendation?
We believe so. Some have, in fact, already have procedures in place that are along the lines being proposed in the Recommendation. This is the case, in particular, for the Czech Republic, Finland, France, Ireland, Germany, the Netherlands, the Slovak Republic and Sweden. The results in these countries from the steps taken to simplify withholding tax relief procedures appear to have been positive, not just for non-resident investors but also for the tax administrations and financial intermediaries.
Is any estimate available of the costs or savings that would result from the implementation of the Recommendation?
Some rough estimates carried out within the Commission are that improved tax procedures would increase EU GDP by € 3.4 billion or 0.028% per year compared to a situation where no tax relief at source or quick refund procedures are available (or more than € 37billion over a 10 year period with an assumed 2 % growth rate of real GDP).
Why a Recommendation rather than a proposal for a Directive?
The Commission believes that a non-legally-binding Recommendation is the appropriate tool. Member States have already moved in the direction proposed in the Recommendation and there are also international moves along these lines. The Commission welcomes this trend and aims with this Recommendation to stimulate the debate further, share information on best practices and provide a forum for further discussion.