The FASTER Directive

The FASTER Directive seeks to address the administrative challenges of WHT procedures by establishing a more efficient and standardised refund process, whilst also addressing tax fraud and tax abuse. Key features of the Directive include:

Digital Tax Residence Certificate:

• A unified digital tax residence certificate will streamline withholding tax refund processes, reducing paperwork and improving efficiency. This single certificate can be used across the EU, simplifying claims for investors with diverse portfolios.

Fast-Track Procedures:

• Two accelerated options—’relief at source’ and ‘quick refund’ that complement the existing standard process. Relief at source applies a lower tax rate directly when dividends or interest are paid, while quick refunds are issued within 60 days. These procedures are estimated to save investors €5.17 billion annually.

Certified Financial Intermediaries:

• National registers and an EU portal will centralise information on certified financial intermediaries. Investors using these certified intermediaries can benefit from faster withholding tax procedures and reduced double taxation.

Standardised Reporting:

• Consistent reporting obligations will help tax authorities verify taxpayer eligibility for reduced rates and detect potential fraud. Certified financial intermediaries will report payment data to tax administrations, enabling them to track payments from the source to the final investor.

Securities Lending is referenced in Recital 10 of the Directive as follows:

‘It is acknowledged that financial arrangements can be used to shift the ownership, in whole or in part, of a security and/or relevant investment risks. It has also been evidenced that such arrangements have been used in dividend arbitrage and dividend stripping schemes, such as the Cum/Ex and Cum/Cum schemes, with the sole purpose to obtain refunds when there was no entitlement thereto or to increase the amount of refund to which an investor was actually entitled.

Arrangements such as future contracts, repurchase transaction, securities lending and securities borrowing, buy- sell back transaction or sell-buy back transaction, derivatives, margin lending transaction and contracts for difference (CFDs) may be considered as financial arrangements in case they imply a temporary or permanent split between the natural person or entity bearing the economic risks of the investment and the legal owner of the share or underlying rights. These examples are not exhaustive.

Furthermore, it is understood that the ownership is not transferred to the buyer or borrower of the securities if the economic risk remains with the seller or lender of the securities through any legal transactions such as securities lending, options or future contracts. Any arrangement under which the dividend is compensated between the parties concerned, may be considered as a financial arrangement.’

A financial arrangement is defined in the Directive as:

‘any arrangement or series thereof, or contractual obligation whereby:

1. any part of the ownership of the publicly traded share, on which a dividend is paid, is or could be, either permanently or temporarily transferred to a related or an independent party; or
2. the dividend is fully or partly compensated, between related or independent parties, in cash or in any other form.

The recitals in the Directive contain a non-exhaustive list of what could be considered a “financial arrangement” including securities lending and borrowing transactions.

ISLA is currently working on an educational paper that describes what beneficial ownership is, in the context of a securities lending transaction, in line with the mechanics of the Global Master Securities Lending Agreement (GMSLA 2010) – Title Transfer. An EU wide definition of beneficial ownership has not been considered as part of the Directive, and ISLA intends to liaise with both the European Commission and the OECD to ensure consistent interpretation across Member States.

While there is OECD guidance on beneficial ownership, this is not in practice followed by most countries, and countries have taken a wide range of approaches in dealing with the application and consequence of the beneficial ownership requirement. Given that the objective of the FASTER directive is to increase efficiency of the existing withholding tax system, it seems to be common ground (among the ISLA members) that there is a need for a precise harmonised definition.