What is the Faster and Safer Relief of Excess Withholding Taxes (FASTER) Directive?

FASTER was originally conceived as the European Commission’s (EC’s) initiative to harmonize withholding tax regimes among the European Union (EU) Member States, ensuring fair taxation and the good functioning of the Capital Markets Union (CMU) by removing obstacles such as inefficient and disproportionately burdensome procedures to relieve excess taxes withheld from non-resident investors on investment income.  Primary goals of FASTER include making withholding procedures more efficient while providing for an infrastructure to guard against tax fraud and abuse.

When will FASTER take effect?

On May 14, 2024, an Economic Financial Affairs Council (ECOFIN) meeting resulted in the EU Member States agreeing on the FASTER Directive. This development does not have any immediate effect to portfolio investors or financial institutions and intermediaries; however, it triggers EU Member States to transpose the FASTER Directive into their national legislation by December 31, 2028, and implement the corresponding administrative and procedural changes by January 1, 2030.

FASTER sets out an operating framework. What are the key elements of this framework?

Several key elements are central to the FASTER Directive.

A common EU Member State electronic Tax Residence Certificate (eTRC) will be issued to residents by Member States within 14 days of request.

Each EU Member State that subjects investment income to taxation in the hands of nonresidents must offer a relief at source and/or a quick refund regime applicable to dividend income from publicly traded shares and optionally to interest from publicly traded bonds.

An obligation for certain intermediaries to become Certified Financial Intermediaries (CFIs) via a European Certified Financial Intermediary Portal.

A standardized reporting regime for CFIs seeking tax relief on behalf of eligible underlying nonresident investors.

What impactful operational changes are anticipated once the EU Member States transpose the FASTER Directive into their national law?

FASTER will allow EU Member States to select from a menu of options.  For example, EU Member States may apply exceptions to relief at source or quick refunds where they perceive a heightened risk of tax fraud.  Accordingly, EU Member states may at their discretion choose to:

• Limit treaty based and local law exemption opportunities only to standard reclaims
• Cap relief at source and quick refunds at EUR 100,000

Member States with “comprehensive” relief at source regimes may continue to support relief at source, although modifications may be necessary to ensure that the regime is sufficiently “comprehensive.” Member States that presently offer only standard reclaims, must introduce relief at source and/or quick refund systems, but these may have limited application as discussed above.

To access quick refunds, eligible EU Member State domiciled investors will need to provide an eTRC and a Self-Declaration confirming their eligibility for treaty or local law reduction benefits and potentially confirming that they are the “beneficial owner” of the income in accordance to the rules of the market of investment.  Although the European Commission is expected to prescribe a standardized template for the Self-Declaration, Member State Self Declarations are likely to vary to some degree depending on whether the source country requires investors to confirm beneficial ownership and which exceptions to relief at source/quick refunds the Member State subscribes to. Investors can expect numerous versions of the Self Declaration which may require consultation with a tax advisor to establish eligibility for tax benefits and whether the investor is deemed a beneficial owner pursuant to the Member State’s national law.

Eligible non-EU Member State Domiciled investors will need to provide an equivalent of an eTRC to be approved by each EU Member State and a Self-Declaration confirming their eligibility for treaty or local law reduction benefits and potentially confirming that they are the “beneficial owner” of the income in accordance with the rules of the market of investment.

If a tax treaty requires additional information to attain a specific tax rate, then the Member State at their discretion may require additional supporting documentation.

Although investors are not directly involved in the CFI’s reporting obligations, CFIs and non-CFI custodians in the payment chain may need to request additional information from investors to comply with the CFI’s reporting obligations.

How will FASTER impact investors?

FASTER will have the effect of broadly changing the operating environment and requirements nonresident investors will use to claim relief from excess taxation, as well as the processes, administrative, and data requirements financial intermediaries must support to assist their clients in achieving relief from excess source country withholding taxation.

While FASTER started out as a uniform withholding tax framework, it has evolved into more of an a la carte menu from which EU Member States may pick and choose when transposing the Directive into national law.  As a result, the extent of harmonization of administrative and procedural requirements and practices is expected to be less than the industry had hoped.

How will FASTER impact intermediaries?

FASTER proposes that certain financial intermediaries domiciled in EU Member states will take on new responsibilities.  It is contemplated that intermediaries that are required or intend to operate in the FASTER environment need to register to become CFIs and be responsible for carrying out comprehensive due diligence and reporting under FASTER’s new parameters.

FASTER may also impact both non-EU and EU Member State intermediaries that are in the payment chain that do not need to register to become CFIs but need to facilitate the passage of investor information along the payment chain to the withholding agent that reports and remits to the source country tax authority.

In cases where EU Member States elect a direct reporting regime, FASTER calls for each CFI in the payment chain to report directly to the source country tax authorities. Non-EU and EU Member State intermediaries in the payment chain that do not register to become CFIs may still need to facilitate the provision of information to the reporting CFI.

FASTER also prescribes that CFIs will be responsible for collecting and verifying investor documentation against currently established Know Your Customer (KYC) rules to establish eligibility for tax benefits.

What should investors and intermediaries consider in the next few years?

Although implementation of the FASTER Directive is a number of years away and the industry awaits the EC’s implementing acts, intermediaries may wish to start thinking about how to manage their risk.

Intermediaries may consider evaluating internal accessibility of investor data and their ability to transmit such data throughout the payment chain.  Intermediaries may also wish to evaluate their internal due diligence processes in preparation to comply with investor verification rules, especially in light of Member States holding CFIs liable to a certain extent for underwithheld tax where the intermediary is not deemed to take reasonable measures to comply with the due diligence provisions of FASTER.

For more in depth information, please see the recent In Focus publication.

If you have any questions or would like further information, please reach out to Steve Vescio, David Weisner, and Alina Kirzner.