Under the terms of double tax agreements, non-residents are often entitled to a lower rate of withholding tax (or an exemption from withholding taxes) on certain cross-border payments. Unfortunately, access to these lower rates or exemptions are sometimes made difficult by lengthy, resource-intensive, or costly refund procedures.

The impact of these procedures is that taxpayers may not claim the reliefs they are entitled to. Additionally, these procedures have also been abused through tax avoidance schemes.

The Commission is therefore looking at ways to make improvements in this area and has launched a consultation on the problems at stake as well as on possible measures and their potential impacts.

Three options for reform are being considered which will be informed by responses to the consultation:

Option 1: Harmonising withholding tax refund procedures to make them more efficient. The issuer of the securities/financial institution applies the domestic withholding tax rate and then the investor claims the refund of the excessive tax withheld.

Option 2: Establishment of a harmonised relief at source system, where the reduced withholding tax rate over dividends, interests, etc, is applied directly by the issuer of the securities/financial institution.

The consultation also explores the combined introduction of options 1 and 2.

Option 3: Enhancing the existing administrative cooperation framework to verify entitlement to double tax convention benefits: This option envisages a reporting and subsequent mandatory exchange of beneficial owner-related information on an automated basis. The aim is to reassure both the country of residence and the source country that the correct level of taxation has been applied to the non-resident investor.

Once again, this could possibly be introduced in combination with option 1 and/or option 2.

While the focus of the consultation is principally on the EU itself, questions are asked about broadening the scope of any proposals. For example, whether any rules should apply only to cross-border investors from EU member states or whether they should extend to investors from non-EU member states and whether information sharing should extend to non-EU financial intermediaries.

Further information about the consultation and a link to the online questionnaire can be found here. Responses are invited until 26 June 2022.