Ross McGill

April 4, 2024|12 Minutes

The FASTER Directive Is Coming Up Fast – Are You Ready?

By now, many of you should have heard about a new proposed EU Directive called FASTER. It stands for Faster and Safer Tax Excess Relief, and it’s planned to come into force on January the 1st 2027. You might see that and think – it’s 3 years away, I have plenty of time. But given what the FASTER Directive actually entails, 3 years really isn’t all that long to get prepared.

The Conception of FASTER

Our story begins around 35 years ago in 1988, when Alberto Giovanini was tasked to analyse the European Union for markets for barriers to the planned Capital Markets Union, or CMU. After a lot of study, he found 15 barriers, 2 of which were to do with withholding tax. At that time, and even now 35 years later, the EU withholding tax landscape is a nightmare, so this wasn’t really a surprise. This is because:

  • Each country has its own rules for taxing non-domestic investors.
  • Of the three possible relief mechanisms (relief at source, quick refund and standard refund), each jurisdiction makes its own choice of which combination to adopt, and what procedures and rules go with those models.
  • The forms are usually paper-based, and claimants need to provide evidence of their tax residency (through tax residence certificates), and that they were or should be taxed at a lower than statutory tax rate (usually a record date position or tax voucher).

That on its own creates a lot of issues. But concerns over tax abuse have also led to a number of parallel anti-abuse measures, such as the EU Directive on Administrative Cooperation in tax matters (DAC). Within that, the DAC6 is focused on the people who seek to undermine AEoI or avoid CRS reporting, while DAC8 is focused on crypto-asset reporting.

This is a very fragmented approach – clearly not the most efficient way to do things. Many investors lose out on potential claims for tax relief because of these complexities, either because they aren’t aware, or because their financial institution doesn’t support a process for that market.

The solution? The FASTER Directive. It was proposed by Spain at the end of its EU Presidency in 2023, and amending text was adopted by the EU Parliament on February 28th 2024. Its main purpose is to make processes more digital and encourage a consistent approach to cross-border withholding tax, and is well on its way to implementation.

How Does FASTER Work?

The FASTER Directive has three main components, which are all similar to, but not the same as the US-qualified intermediary system. There are three main components to the directive:

Documentation and Due Diligence: Under the new FASTER Directive, every EU market will be required to design and build an electronic tax residency certificate (eTRC) system. This system must be capable of issuing a digital certificate of tax residency to both individuals and entities within three days of application. The certificates issued also have to be valid only for the year they are issued in, and will need to be renewed every year.

All good in theory. We expect that there will be a huge call for tax administrations in the run-up to the Directive coming into effect, so that financial institutions can be ready to implement the rules and maintain the tax benefits for their clients.

However, there’s no kind of provision in the Directive for financial institutions to make bulk requests for eTRCs on behalf of their clients, even with power of attorney or a letter of authority. This makes things a bit trickier. In the absence of this simple operational mechanism in any country, investors in their thousands will be left with no choice but to flock to tax administration websites to make their applications.

National CFI Registers: Every EU market must establish a national register of certified financial intermediaries (CFIs) who are authorised to act as withholding agents. This will allow financial institutions in any market to apply to be a withholding agent in any other EU market. While FASTER CFI status is probably going to be adopted by mainly EU-based financial institutions, the Directive allows non-EU financial institutions to become EU withholding agents too, provided they can demonstrate equivalence with the Directive’s main components.

Source-Country Reporting: Every CFI that grants tax relief to an investor is obliged to report that transaction to the source country’s tax administration within 20 days. They will need to detail what relief was granted and to whom, so that the source country’s tax administration can recreate the payment chain (should they want to).

The only variance here is that any dividend payments of under €1,500 will be exempt from reporting. The source country is the jurisdiction of the issuer of the security related to the payment. So the expectation is that each jurisdiction will then use AEoI (automatic exchange of information) rules to get back information about where their citizens are investing their money and getting tax relief. Even with an eTRC, the Directive requires that every investor makes a self-declaration to a financial institution to claim treaty benefits. So financial institutions will need to validate the eTRCs and other information about the investor under the ‘reason to know’ rules. They will also need to prove that they conducted anti-evasion procedures designed to catch any repetition of the cum-ex and similar tax fraud. They will need to do this for every single claim.

Variances and Problems

Understandably, the Directive still has several variances and exceptions to this, rather simple, digital model. That includes rules that prevent a CFI from granting tax relief to an investor if they have bought the security on which the claim is based less than 2 days before the ex-date. This on its own means that CFIs will need to enhance their systems, policies and procedures to be able to assess a potential claim based on trade data, as well as beneficial ownership data.

On top of that, the eTRC concept is a pretty big departure from what everyone else is doing when it comes to cross-border taxation. In particular:

  • The OECD Tax Relief and Compliance Enhancement (TRACE) program.
  • The OECD Common Reporting Standard (CRS) framework.
  • US Chapter 3 (QI) taxation rules.

All of these use the principle of a self-certification of tax residency, which is then supported by due diligence rules. So liability then rests with the investor. The EU FASTER model works on eTRCs issued by tax administrations, leaving liability with the tax administration. The proposed system even goes against advice given by the European Commission’s own advisory group (T-BAG), who recommended the use of self-certifications in its 2013 report.

We think this will cause a number of problems for the onboarding of new clients. For example, if a French bank were onboarding a German client who invests in the EU and the US, they will need three documents in order to provide tax services:

  • A W-8 self-certification for the US market (QI & FATCA)
  • A CRS investor self-declaration (ISD) for CRS reporting.
  • An eTRC for any EU market that the investor has securities in.

This means that the compliance landscape will get very onerous very quickly for financial firms that haven’t fully digitised and automated this area.

So What Happens Next?

Now you understand why 3 years isn’t really that long to get things ready. And that might not even be all – we fully expect there to be more changes to the proposed Directive before it’s voted on in the EU parliament. It requires a unanimous vote, and once that’s done then each EU member state will be required to transpose the Directive directly into local law by December the 31st 2026, so that it can go into law on January the 1st 2027.

But with Spain already suggesting a delay to FASTER implementation until 2029, that detail might be changed. Knowing how good governments are at implementing complex IT systems, an extra 2 years might not be a bad idea! However, the EU market wants all of these difficult issues solved quicker (or faster), so it’s difficult to tell.

The Association of Qualified & Authorised Intermediaries (AQAI) has a sub-committee keeping a very close eye on FASTER, and they even submitted comments during the consultative process. If you’re interested in joining AQAI, click here to visit the site. Membership is free!

Or, if you’re worried about the impact FASTER might have on your financial institution, you can contact us. TConsult offers an Exposure Map Report (EMR) to help establish your firm’s specific circumstances, client numbers and the types of markets you invest in. We then map these against the FASTER Directive’s rules and report back on the recommended preparatory actions you can take. For more information, or to request your own exposure map report, just get in touch here.

Ross McGill

Ross is the founder and chairman of TConsult. He has spent over 26 years working in the withholding tax landscape with companies developing tax reclaim software and operating outsource tax reclamation services.

Ross not only sees the big picture but is also incredibly detail oriented. He can make even the most complex issues simple to understand. He has authored 10 books (including two second editions) on various aspects of tax, technology, and regulation in financial services, making him one of the leading authorities in the world of tax.