The European Council has adopted the FASTER directive. Unfortunately, we have to wait until 2028 before we benefit from it.
Foreign withholding tax
What exactly is the problem? When you currently receive dividends or interest originating from another country, that country often withholds a withholding tax on them. In many countries, that withholding tax is (substantially) higher than the tax right regulated for the source country in the tax treaty. You have to reclaim the excess withholding tax withheld in the source country. This is often a difficult and time-consuming process.
For example, when you receive dividends on stock market shares you hold in the German company Allianz, 25% of German withholding tax is withheld from them. You will receive 75% of the gross dividend in your bank account. You must include the shares in your Dutch income tax return in your income from savings and investments (box 3). You therefore pay income tax on them in the Netherlands. You may offset the withheld German withholding tax against the Dutch income tax (make sure you include this in your tax return), but no more than 15% of the gross dividend. That 15% is the part of the tax allocated to Germany in the tax treaty. You may reclaim the 10% that Germany withheld in excess on the basis of the treaty from the German tax authorities. To do so, you have to send the appropriate form, with supporting documents, to the German tax authorities.
Simplification
The purpose of the FASTER Directive is to make foreign withholding tax refund procedures faster, simpler and more secure. Of course, the FASTER Directive only applies within the European Union. For withholding tax withheld by countries outside the EU, the treaty procedure agreed with that country for refund of excess withholding tax withheld must be followed.
FASTER is introducing a common digital tax residence certificate (eTRC). With this certificate, taxpayers can use the accelerated procedures to obtain exemption or refund of withholding tax.
The directive allows member states to use one of the following systems:
- exemption at source: then the correct tax rate is applied at the time of payment of interest or dividends;
- prompt refund: under which excess withheld withholding tax is quickly refunded.
All EU member states must transpose the FASTER directive into national law by 2028. Under strict conditions, member states can be exempted.