The FASTER directive: New tax rules to encourage cross-border investments

Objectives of the FASTER Directive

This FASTER Directive aims to ensure fair taxation and strengthen the capital markets union. The objectives are to facilitate cross-border investments and improve tax transparency to effectively combat tax fraud. It aims to make withholding tax procedures in the EU safer and more efficient for cross-border investors, national tax authorities and financial intermediaries, such as banks or investment firms.

The FASTER Directive will align withholding tax relief procedures between different countries in the EU to ensure that investors do not pay double tax on the returns of their cross-border investments. This is an important step towards strengthening the Capital Markets Union, as more efficient withholding tax procedures will encourage investment in EU financial markets, reduce administrative burdens and make it easier to detect tax fraud.

Tax is a complex topic

Investment strategies and related cross-border tax aspects can have a significant impact on the directions that investors and asset managers give to investments. The lack of harmonization between the European Member States and their respective tax authorities is certainly not a favorable element.

The European Union has started to address this problem through FASTER, its directive on the harmonisation of withholding taxes.

In the text of the Directive, we can find very ambitious objectives such as:

• An EU Common Digital Tax Residence Certificate (eTRC) that investors would use to benefit from fast-track procedures for withholding tax relief

• Two fast-track procedures to complement the current standard procedure for the refund of withholding taxes:

1.  A "quick refund" system where the refund of overpaid withholding taxes takes place within a set time deadline

2.  A "relief at source" procedure where the relevant tax rate is applied at the time of payment of dividends or interest

• A standardised reporting obligation for financial intermediaries. Member States will set up national registers in which large financial intermediaries will have to register to be certified via a new European Certified Financial Intermediary Portal.

European adoption in the 10 December 2024

After a new European Parliament consultation, the Council of Europe adopted on 10 December 2024, the new rules for withholding tax procedures (FASTER). The Directive should be published in the Official Journal of the European Union (OJEU) and enter into force on the 21st day thereafter. Member States will have to transpose the provisions of this Directive into their national law by 31 December 2028, for application from 1 January 2030. 

Focus on the new FASTER reporting

The FASTER Directive introduces legislation that requires more reporting requirements.

The Commission has set up several working groups, in which Societe Generale Securities Services (SGSS) participates. The outcomes of the groups will contribute to the preparation of implementing acts.

With regard to the type of transmission protocol for these reports, the industry was considering using the OECD Trace XML as a starting point (TRACE XML Schema | OECD) or the ISO20022 XML protocol.

As it is well known, the ISO20022 XML protocol has already been adopted for the communications required by Directive 2007/36/EC on shareholder rights, commonly known as the Shareholder Rights Directive II (SRD II).

The use of ISO20022 messages for the requirements of FASTER reports may be designed taking into account the data elements required by the different Member States, including the requirements of the Finnish TRACE Communication.

The adoption of communication protocols already existing in the world of securities services (e.g. messages relating to the process of notification and exercise of voting rights so-called "general meeting" and those introduced by SRD II such as reporting referring to Shareholder Identification) will produce a series of advantages for all actors in the chain.

Using this ISO20022 XML protocol for FASTER reporting would have many advantages:

• It would be consistent with the requirements of SRD II and its implementing Regulation

• It could be exchanged via API, uploaded to a website, on the SWIFT network, etc.

• It could be constructed taking into account the structure used in TRACE XML and the shareholder identification response

• It would benefit from an existing maintenance process that provides certain dates and processes for implementations, changes and requests following ISO 20022 rules.