The European Commission has noted that the way dividend and interest taxation is applied in the European Union (EU) member states represents a major deficiency in the capital market at the community level.

For this reason, the institution has launched the FASTER initiative (Faster and Safer Tax Relief), in the form of a directive project, which aims to simplify the mechanism so that investors can benefit from more favorable conditions when obtaining income from dividends or interest on such instruments.

Mainly, the new regulation proposes a fast procedure for issuing tax residence certificates, easier access to the facilities offered by existing regulations (treaties and directives), and simplified formalities for recovering withheld taxes on dividends and interest, where applicable.

Simplifying the issuance of tax residence certificates

In this context, the concept of an electronic tax residence certificate (eTRC) is introduced, with a standardized format and simplified issuance procedures within a maximum of one working day. The eTRC will be valid for the entire year, regardless of the issuance date.

As a result, companies making recurring payments subject to withholding tax can benefit from reduced administrative documentation burdens.

New registration and reporting obligations for financial intermediaries

Furthermore, the project aims to introduce a comprehensive set of registration and reporting obligations for financial intermediaries seeking FASTER certification to comply with Common Reporting Standards (CRS).

While financial intermediaries will initially go through these additional procedures, in the long term, alignment with other reporting standards will benefit all market players by simplifying procedures for tax relief or withholding tax exemption.

Additionally, the commission's proposal introduces a new aspect regarding reporting obligations for financial intermediaries. They will be required to promptly report information to authorities regarding their clients receiving interest and dividends from instruments traded on authorized markets, as well as information about the payers involved in these transactions, similar to the practices of banks today.

Benefits for intermediaries and their clients

Certified FASTER financial intermediaries will enjoy priority procedures for reducing and/or recovering withholding taxes for their clients. On the other hand, they will become responsible for verifying the tax residence of their clients, ensuring clients' eligibility for tax reductions (according to double taxation treaties or national legislation), and for tax refunds.

For these purposes, intermediaries need to collect documents that demonstrate their clients' status as beneficial owners of dividend and/or interest flows from traded instruments, and closely match acquisition dates with ex-dividend dates.

According to the project, clients of these financial intermediaries will benefit from the refund of withheld taxes (through a regularization process) within 25 working days from the request, whereas currently, this operation can take months or even years depending on the involved jurisdictions.

It's important to mention that the introduction of the rapid refund procedure does not exclude the option for recipients of interest and dividends from publicly traded instruments to directly request the standard refund procedure from the relevant tax authorities.

Timeline of implementation

The FASTER proposal is currently under public debate and may undergo changes before becoming a directive and subsequently national legislation in each member state. In its current form, the project stipulates that member states are obligated to transpose the directive at the national level by December 31, 2026, with implementation from January 1, 2027.

Until that moment, financial intermediaries should decide to what extent they intend to certify themselves according to the new regulations (especially from a competitiveness perspective) and ensure staff preparation in terms of the knowledge required for carrying out due diligence procedures (tax residence, substantial and formal conditions related to the application of double taxation treaties, and applicable reductions and exemptions under each member state's internal legislation).

Furthermore, they need to prepare due diligence procedures (including GAP analysis / anti-money laundering - AML - or know your customer - KYC - analysis, documentation templates, IT system setup, etc.).

In conclusion, the new legislative proposal supports investors from all EU member states with simplified registration and regularization procedures for withheld taxes on income obtained from dividends and interest, while also imposing additional obligations on entities involved in such transactions.

(Opinion piece by Daniel Grigore, Senior Manager, Direct Taxation, Deloitte Romania)