The European Commission has put forth new regulations aimed at preventing financial traders from exploiting tax refunds and streamlining withholding tax relief.
The proposal, drafted in response to the "cum-ex" and "cum-cum" dividend tax scandals that resulted in significant tax losses for EU governments, aims to implement a common digital tax residence certificate to facilitate withholding tax relief. The proposal also includes relief at source and a quick refund system as fast-track procedures to complement existing policies.
According to Mairead McGuinness, EU Commissioner for Financial Services, the current paper-based tax procedures hinder investment and negatively impact retail investors who often fail to claim entitled tax refunds. McGuinness emphasized that the proposed regulations would not only combat tax fraud but also simplify and expedite the tax reclamation process for both investors and tax authorities.
The relief at source mechanism would apply a tax rate based on existing double tax treaties at the time of dividend payment, while the quick refund system would ensure taxpayers are reimbursed within 50 days of payment. The European Commission estimates that these streamlined procedures could save investors €5.1 billion annually.
To enhance tax fraud detection, the EU plans to establish a standardized reporting system for tax authorities to verify taxpayers' eligibility for reduced withholding rates. Intermediaries, including financial institutions and accounting firms, would be required to report dividend and interest payments as part of this system.
Although large EU financial intermediaries would need to join a national register, participation would be voluntary for non-EU and smaller intermediaries. The aim is to reduce the risk of tax fraud and facilitate refund processing for tax authorities.
The proposal's effective implementation relies on the support of all EU member states, with the rules anticipated to take effect on January 1, 2027. However, the ongoing "cum-ex" scandal, one of Europe's largest tax scandals, continues to impact businesses across Europe and beyond.
The fraudulent "cum-ex" trading scheme involved banks and investors trading shares around dividend pay-out dates to claim rebates. Germany banned the practice in 2012, estimating losses of over €10 billion. However, similar schemes persisted in multiple EU member states, resulting in extensive investigations and legal actions.
Financial institutions, including BNP Paribas, Crédit Agricole, HSBC, Société Générale, Natixis, and Exane, are currently under investigation in France for alleged involvement in dividend stripping. The scandal has also extended to Belgium, Spain, Italy, the Netherlands, Denmark, Austria, Finland, Poland, the Czech Republic, Norway, Switzerland, and even the UAE.
Notably, hedge fund trader Sanjay Shah is being extradited to Denmark over allegations of masterminding a "cum-ex" scheme that defrauded the Danish Treasury. The magnitude of lost revenue underscores the importance of EU-wide reform to prevent future tax abuses.
In summary, the European Commission's proposed regulations aim to combat tax fraud, simplify withholding tax relief, and establish standardized reporting systems to curb tax evasion. The measures are a response to the "cum-ex" scandal and seek to protect investors and streamline tax procedures across the EU.
By fLEXI tEAM