Fund Taxation Alert 2023-06

On 19 June 2023, the European Commission (EC) proposed some actions to address the previous constraints to investors, financial intermediaries and national tax authorities, under the new European Union (EU) system for the avoidance of double taxation and prevention of tax abuse in the field of withholding taxes, so-called Faster and Safer Tax Excess Relief (FASTER).

The main measures proposed by FASTER can be summarized as follows:

• A common EU digital tax residence certificate will make withholding tax relief procedures faster and more efficient
• Two fast-track procedures complementing the existing standard refund procedure:
  • Relief at Source procedure - the tax rate applied at the time of payment of dividends or interest takes into consideration the applicable rules of the double taxation treaty (DTT) provisions
  • Quick Refund procedure - the initial payment is made considering the withholding tax rate of the Member State where the dividends or interest are paid, but the refund for any overpaid taxes is granted within 50 calendar days from the date of payment
• Standardized reporting obligation, where certified financial intermediaries will have to report the payment of dividends or interest to the relevant tax administration for tracing of transactions

The EC has opened a feedback period on the Proposal, which will last until end of August 2023. All feedback received will be summarized by the EC and presented to the parliament and Council with the aim of feeding into the legislative debate.

For further information regarding the initiative, please refer to the Euro Tax Flash published by KPMG’s EU Tax Center.

The EC indicated that it aims to have the proposal come into force on 1 January 2027.

The efforts to create a common system for withholding tax relief for dividend and interest payments are very welcomed by investors, considering the current burden and effort they face to obtain double taxation relief on their investments.

However, when we consider specifically investment funds, it is unclear at this stage if this initiative will help to overcome several barriers that exist. For example:

• FASTER does not address under which conditions an investment fund is eligible to a DTT or to a refund under the EU fundamental freedoms in application of the decisions of the Court of Justice of European Union (CJEU) in the Santander/Aberdeen cases (EU law claims). Even though the procedure relief/reclaim should be simplified, this essential question remains open. Therefore, investment funds will still have to go through litigation in certain countries to obtain a refund of the unduly suffered WHT
• It is questionable whether FASTER will apply to relief at source/refund cases where the aim is to allow the investment to benefit from a full exemption of withholding tax (i.e., for all cases where the effectively applicable tax rate will be below 15%). Based on the current reading of FASTER, it seems that these cases (domestic and EU law claims) will still be handled by the tax authorities of the respective countries and not only by the financial intermediaries

In the light of the above, a positive evolution in the next years regarding the tax landscape for investment funds at the level of the EU remains complicated. It will be interesting to understand if once FASTER is implemented, additional updates to the process and to the eligibility of funds to DTT and EU law can be expected to ensure that investment funds will not be subject to tax leakage.