EU: European Commission proposal to improve withholding tax procedures
Proposed changes are expected to become effective 1 January 2027
Proposed changes are expected to become effective 1 January 2027
The European Commission (EC) has proposed new rules to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries (e.g., banks) and member state tax administrations.
According to the related EC release, this initiative—a key element of the Communication on Business Taxation for the 21st Century and the Commission's 2020 Action Plan on the Capital Markets Union—will promote fairer taxation, fight tax fraud, and support cross-border investment throughout the EU.
Background
Cross-border investors generally may submit refund claims for excess tax withheld by another member state under applicable income tax treaties. However, these refund procedures are often lengthy, costly and cumbersome, causing frustration for investors and discouraging cross-border investment within and into the EU. In addition, the withholding tax procedures applied in each member state are very different. Investors have to deal with more than 450 different forms across the EU, most of which are only available in national languages. Refund procedures also can be abused; the tax losses from these practices have been estimated at €150 billion for the years 2000-2020.
The following proposed actions can make life easier for investors, financial intermediaries, and national tax authorities:
- Common EU digital tax residence certificate
- Two fast-track procedures complementing the existing standard refund procedure
- Under the “relief at source” procedure, the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules of the applicable income tax treaty.
- Under the “quick refund” procedure, the initial payment is made taking into account the withholding tax rate of the member state in which the dividends or interest is paid, but the refund for any overpaid taxes is granted within 50 days from the date of payment.
These standardized procedures are estimated to save investors around €5.17 billion per year. In addition, a standardized reporting obligation will provide national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse.
Next steps
Once adopted by member states, the proposed changes are expected to become effective 1 January 2027.
Read a June 2023 report prepared by the KPMG EU Tax Centre
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