Goodwin Insights June 23, 2022

Public Consultation on a Common EU-Wide System for Withholding Tax Claims on Dividend and Interest Payment

Background 

The EU Commission published a public consultation based on its initiative to introduce a common EU–wide system for withholding tax on dividend or interest payments, which includes a system for tax authorities to exchange information and cooperate with each other. 

Reasons behind the initiative

Behind this initiative, the aim is to significantly lower tax compliance costs for cross–border investors, such as access to lower tax rates or exemptions, and prevent tax evasion.

Withholding tax refund procedures for cross–border payments for non–resident investors who get the right to a lower rate or exemption of withholding tax have proved to be lengthy, resource–intensive and costly for both investors and tax administrations due to the difficulties for tax administrations to properly assess the entitlement to reduced withholding tax rates or exemption and the lack of digitalized procedures. This may result in double taxation for some non–resident taxpayers, making the EU market less attractive.

Moreover, those procedures have been abused using large–scale tax fraud known as “Cum/Ex” and “Cum/Cum” schemes, under which multiple refunds were claimed from various EU governments in regard to cross–border payments and withholding taxes that never actually happened in some EU Member States. 

The EU initiative 

Even though there is no concrete proposals, three main options are considered through this initiative:

  • Harmonizing withholding tax refund procedures to make them more efficient by implementing several measures to simplify and streamline withholding tax refund procedures; 
  • Establishment of a harmonised relief at source system; and
  • Enhancing the existing administrative cooperation framework to verify entitlement to double tax treaty benefits. This option envisages a reporting and subsequent mandatory exchange of beneficial owner–related information on an automated basis.

The EU consultation also envisages to combine options 1 and 2.

Next step

At the end of the public consultation, any recommendations would be put forward in the fourth quarter of 2022 and a proposed Directive may be subsequently released. This will need to be closely monitored in the coming months. 

Sami Ayadi was a contributing author to this insight.