Executive summary

During the Economic and Financial Affairs Council (ECOFIN) meeting on 10 December 2024, the Council of the EU (i.e., the EU Member States) adopted the Directive setting forth rules that aim to make withholding tax (WHT) procedures in the EU more efficient and secure for investors, financial intermediaries and Member States (the Directive or FASTER).

A political agreement on FASTER, reached under the Belgian Presidency on 14 May 2024,¹ included several amendments made during the negotiations of the European Commission's (the Commission) original proposal.² As a result, the European Parliament needed to be reconsulted for a second (nonbinding) opinion, which it provided on 14 November 2024. In addition, a legal-linguistic review was required.

The final compromise text, released on 29 November 2024, and formally adopted by the Council on 10 December 2024, includes only legal-linguistic revisions and clarifications, with no substantial changes.

The Directive outlines the following key provisions:

• The Member State of residence shall issue digital tax residence certificates (eTRCs) to individuals and corporate entities within 14 calendar days of their eTRC request.
• Under certain conditions, Member States should choose between a "relief at source" procedure and a "quick refund" system, or a combination of both, for WHT on dividends from publicly traded shares and, where applicable, interest from publicly traded bonds.
• A new standardized reporting process imposes common reporting obligations on certain financial intermediaries involved in the payment chain.

EU Member States have until 31 December 2028 to transpose the Directive into national legislation, with the rules applicable from 1 January 2030.

Detailed discussion

Background

In June 2023, the Commission published the legislative proposal for FASTER, and launched a public consultation, inviting public input on the proposal in the form of open comments to be submitted by 14 August 2023. (EY submitted a comment letter, which can be accessed here).

EU Member States began negotiations on the draft Directive in the third quarter of 2023, with the European Parliament providing its initial nonbinding opinion on 28 February 2024. As discussions progressed, a political consensus on FASTER was achieved on 14 May 2024. The resulting significant alterations necessitated a second nonbinding opinion from the European Parliament. Highlights of the now-adopted final compromise text follow.

The FASTER Directive

The final version of the adopted Directive contains only legal-linguistic revisions and clarifications, with no substantial changes compared to the compromise text of 14 May 2024.

The three key actions introduced by the Directive are summarized below.

1. Digital tax residence certificate
   The Directive introduces an eTRC, which Member States are to issue through an automated process to individuals or entities deemed to be residents in their jurisdiction for tax purposes. The eTRC should be issued within 14 calendar days after the submission of the request for its issuance, and it covers a period equal to the calendar or fiscal year for which it is issued. However, Member States can revoke an eTRC if the tax administration has evidence that the individual or entity is not a tax resident for all or part of that period. Member States should recognize an eTRC issued by another Member State as adequate proof of a taxpayer's residence in that other Member State. To facilitate this, the Commission is expected to adopt implementing acts with standard computerized forms and technical protocols for the issuance of an eTRC.
2. Relief systems
   

The Directive introduces a standardized WHT relief procedure, which is mandatory for dividends from publicly traded shares and optional for interest payments on publicly traded bonds. This procedure applies only when the entity making the payments is tax resident in an EU Member State. Member States can choose between the following two relief systems, or a combination of both:

1. "Relief at source" procedure: The tax rate is applied at the time the dividends or interest is paid and is based directly on the applicable rules of the double taxation treaty or domestic tax law provisions.
2. "Quick refund" procedure: The initial payment is made considering the maximum WHT rate of the source state, but the refund for any overpaid taxes is granted within 60 days of the date of payment.

Member States will have the option to maintain their current procedures, and not apply a standardized WHT relief procedure, if they already provide a "comprehensive relief-at-source system" and their market capitalization ratio, as set out in the four latest publications by European Securities and Markets Authority available on 31 December 2028, is less than 1.5% for at least one of the four consecutive years. "Market capitalization ratio" means the ratio expressed as a percentage of the market capitalization of a Member State on 31 December to the overall market capitalization of the EU on 31 December, in a given year.
If this ratio is exceeded for four consecutive years, all rules foreseen by the Directive will become irrevocably applicable regardless of whether the market capitalization ratio falls below the threshold at any later time. In such cases, Member States will have five years to transpose the rules of the Directive into national law.
A "comprehensive relief-at-source system" refers to a system that is applied by a Member State and meets specific conditions outlined in the Directive. These conditions include that the Member State:

• Provides access to relief to any natural person or entity that is entitled to relief, according to national rules of the source Member State or a double tax treaty (Recital 5 of the Directive clarifies that the national relief-at-source system should not only legally allow for relief but also ensure that such relief is "de facto granted" to taxpayers who are entitled to it.)
• Grants relief on the payment date, except for failure to report the information required by the Member State providing the relief
• Has a relief-at-source system that provides access to both direct and indirect investments and aligns with the exclusions under Article 11(2) of the Directive
• Requires no additional information or obligations beyond Articles 12, 13, and 15 of the Directive
• Has laid down rules on liability for the loss of withholding tax revenue and effective, proportionate and dissuasive penalties applicable to infringements of national provisions on that relief-at-source system

Even if the exemption above does not apply, Member States can still restrict the use of relief-at-source or quick refund procedures in cases of elevated risk of tax fraud and abuse. Article 11(2) of the Directive lists situations in which Member States have the discretion to reject relief requests and conduct further checks, stating as follows:

1. the dividend has been paid on a publicly traded share that the registered owner acquired in a transaction carried out within a period of five days before the ex-dividend date;³
2. the dividend payment on the underlying security for which relief is requested is linked to a financial arrangement that has not been settled, expired or otherwise terminated before the ex-dividend date;
3. at least one of the financial intermediaries in the securities payment chain is not a certified financial intermediary (CFI) and no CFI has assumed the position of that financial intermediary;
4. an exemption of the withholding tax is claimed;
5. a reduced withholding tax rate not deriving from double tax treaties is claimed;
6. the dividend payment exceeds a gross amount of at least €100k, per registered owner and per payment date.

With regard to point (f), the Directive further clarifies that the amount shall be determined based on the gross dividend amount for each investor holding equity in a collective investment undertaking⁴ when this underlying investor is entitled to relief under the indirect investments provisions of the Directive.
Furthermore, the Directive provides that point (f) will not apply if the entity entitled to the relief of excess WHT is either a:

• Statutory pension scheme of a Member State or an institution for occupational retirement provision registered or authorized in a Member State
• Collective investment in transferable securities or an alternative investment fund (AIF) established in the EU, or an AIF managed by an alternative investment fund manager (AIFM) established in the EU

It is also worth noting that the final Directive has not provided a self-contained definition of beneficial ownership. Instead, Article 12 of the Directive provides that the registered owner⁵ shall declare, when required by the source Member State, that they are the beneficial owner in accordance with national legislation of the source Member State or a double tax treaty, where applicable.

Next steps

Following adoption of the Directive by the Member States, the final version will be published in the Official Journal of the EU. EU Member States should transpose the provisions of the Directive into their national laws by 31 December 2028. This means that Member States may implement the rules earlier if they choose. It is expected that the Commission will work on guidance to further explain how certain terms and requirements should be interpreted.

Implications

The Directive introduces a standardized eTRC process to replace the varied and time-consuming paper-based processes in many Member States. Establishing a common EU-wide system for WHT on certain dividend and interest payments is expected to positively affect the functioning of cross-border capital markets.

Asset-servicing organizations that typically provide WHT services to clients, such as custodian banks, are expected to also be significantly affected. These organizations will need to understand the impact on their business model, liability and client relations. CFIs need to manage their new compliance risks and fulfill their obligations, especially in verifying information when conducting due diligence. Further, the short timeframe for CFIs to raise a quick refund application puts pressure on their systems and capabilities.

Member States have until the end of 2028 to introduce the provisions, but they can implement the rules earlier, meaning the reporting requirements and processes could come into force sooner. This early adoption could lead to varying implementation timelines. Thus, businesses and investors should closely monitor the adoption of these rules by EU Member States and the operational details provided by the Commission through implementing acts.