Revving up for FASTER

With five years to go before the application of the FASTER Directive, what are the five key considerations for the investment fund industry?

The EU Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER) has been officially adopted by the Council of the European Union. This Directive aims to make withholding tax procedures safer and more efficient for cross-border investors, national tax authorities, and financial intermediaries. FASTER introduces a common tax residence certificate enabling investors to benefit from fast-track procedures to obtain relief from withholding taxes by way of automated digital tax residence certificates for those deemed tax resident in a Member State. Standardized reporting obligations will be introduced for financial intermediaries to enable tax authorities to trace the underlying transactions. While this Directive represents a breakthrough for investors and fund managers, it also raises crucial challenges for the investment fund industry concerning the implementation as well as the operational execution of the new rules, which will apply from 2030.

What new rules does FASTER introduce?

Avoidance of double taxation: As current withholding tax relief procedures are inconsistent across Member States, this results in lengthy, costly and burdensome relief or refund procedures on cross-border investments, potentially creating double taxation for cross-border investors. The FASTER Directive introduces standardized tax relief procedures that aim to make the process more consistent within the EU, faster and less prone to potential tax leakage.

Common tax residence certificate: A significant feature of the directive is the introduction of a common EU digital tax residence certificate (eTRC) that investors would use to benefit from the fast-track procedures to obtain relief from withholding taxes. Member States will provide an automated process to issue eTRCs to a natural person or entity deemed tax resident in their jurisdiction.

It's worth noting that while the eTRC is expected to streamline and speed up withholding tax procedures by replacing the paper-based processes still used by most Member States, industry members have noted the organizational impacts that the eTRC system will entail, as well as the need for a monitoring and auditing framework to be implemented.

Fast-track procedures: The Directive will allow Member States to have two fast-track procedures complementing the existing standard refund procedure for withholding taxes:

(a) a “relief-at-source” procedure where the relevant tax rate is applied at the time of payment of dividends or interest;

(b) a “quick refund” system where the reimbursement of overpaid withholding tax is granted within a short set deadline.

The Council added provisions for indirect investments where the investor invests through a collective investment undertaking. These provisions ensure that legitimate investors such as certain funds or their investors have access to the fast-track procedures.

Standardized Reporting for Financial Intermediaries: In an effort to aid national tax authorities in detecting potential tax fraud or abuse, financial intermediaries such as banks and investment platforms will have to adhere to standardized reporting obligations. A European Certified Financial Intermediary Portal will be established through which large (and optionally smaller) financial intermediaries registered in their national register can be certified to provide the required documentation on underlying transactions to the tax authorities.

What are the five key considerations for the investment fund industry?

1. Increase in cross-border investments: By making withholding tax procedures more efficient and easier to execute, the Directive further encourages cross-border investments, thereby contributing to the objectives of the Capital Markets Union. This opens up new opportunities for fund managers to attract more cross-border investors, invest in additional jurisdictions and further expand their market reach.
2. Increased compliance obligations: While the Directive aims to streamline processes, the initial implementation phase is likely to result in an increased administrative burden. Stakeholders will need to adapt to the new procedures and ensure that their systems and processes are aligned with the Directive's requirements. Standardized reporting obligations must be adhered to and accurate records of transactions involving withholding taxes need to be maintained. This includes verifying the tax residency of investors and ensuring all necessary documentation is in place.
3. Operational complexity: Implementing the new procedures and digital tools required by the Directive may pose operational challenges. Certified Financial Intermediaries (CFIs), especially those involved in asset servicing e.g., custodian banks, will need to invest in technology and training to ensure they can efficiently manage withholding tax processes and comply with the new requirements. As an illustration, industry members have raised concerns about the challenging new reporting obligations imposed on CFIs, which mandate reporting within 60 to 90 days of payment dates. There is a significant amount of data their clients will need to collect for that purpose, and having the right systems in place to collect and report the correct information within this short window will be a critical challenge.
   
   All stakeholders of the investment fund industry should expect a significant amount of work to update their internal processes, IT systems and data management systems to comply with the new procedures and documentation requirements. This represents a significant undertaking and will impact several business functions (e.g., tax, operations, compliance, risk management, and service provider management, to name a few).
4. Risk of tax abuse: The Directive mandates robust risk management practices to monitor potential tax abuse. Stakeholders must ensure that all transactions are legitimate and comply with the Directive's requirements. Member States can reject the registration of CFIs if they are under investigation for tax abuse or have committed infringements of national legislation.
5. Get a head start and stay up to speed: While the 2030 application date of this Directive may sound like a long way ahead, the devil lies in the details. The rules are complex, exclusions might apply in certain cases, and knowledge of the new procedures as well as the impact on current systems, processes and procedures will be extremely important to be ready in time. The investment fund industry must therefore begin preparing by ensuring they have an adequate understanding of FASTER and its requirements. Awareness and training sessions for resources to stay informed will be key over the next months and years.

Next steps

Member States are required to transpose the Directive into national legislation by 31 December 2028, with the national rules applying from 1 January 2030. Faced with both significant opportunities and implementation challenges to come, the investment fund industry can greatly benefit from proactive preparation in anticipation of FASTER.