The European Commission is proposing new rules to make withholding tax procedures in the EU more efficient and secure for investors. Whilst these proposals will not be available until 2027 at the earliest, Irish common contractual funds, or CCFs, have been leading the way in tax transparency and efficiency since 2003. CCFs provide a secure and efficient way for investors and managers to navigate tax withholding procedures.

In this blog, Kevin Duggan, Client Solutions at Carne Group, explains what the European Commission’s proposal means for investors and managers and what you need to consider in setting up a CCF.

Background

The European Commission published a legislative proposal on 19 June 2023 for the Council Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER). The current process for dividend and interest withholding tax refunds is challenging – it is lengthy, unclear and differs from country to country. Additionally, investors must deal with more than 450 different forms across the EU, most of which are only available in national languages. This discourages cross-border investments within and into the European Union.

The Commission is proposing a uniform relief procedure to make the refund procedure faster and clearer and to curtail tax fraud and abuse. This is set to come into force on January 1, 2027, once adopted by Member States.

The Directive proposes the establishment of a common EU digital certificate of tax residence and two fast-track systems of relief. This is intended to complement the existing standard refund procedures – a “relief at source” procedure and a “quick refund” system. Member States can choose which one to use, or to include a combination of both:

• Under the “relief at source” procedure, the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules of the double tax treaty provisions.
• Under the “quick refund” procedure, the initial payment is made taking into account the withholding tax rate of the country where the dividends or interest is paid, but the refund for any overpaid taxes is granted within 50 days from the date of payment (or 25 days from date of request). If the refund request has not been processed in time, interest will be due and payable by the tax authority.

The Directive also proposes the introduction of a standardised reporting obligation to provide tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse. Certified financial intermediaries will have to report the payment of dividends and interest to the relevant tax administration so that the latter can trace the transaction.

Sounds complicated?

It is, and in our experience, the length of time and cost involved in pursuing reclaims can mean that the cost/benefit analysis very often concludes on forgoing a reclaim and suffering the higher taxes. The introduction of simplified, faster and streamlined processes for excess withholding tax reclaims will be a welcome development for investors.

In the meantime, help is at hand here at Carne.

We are continuously reviewing the details of all relevant tax treaties to ensure our clients’ funds and their investors can get the best outcome. And we have been using an Irish tax efficient CCF to help our clients and their investors.

How does the CCF help our clients? 

This fund structure allows us to ‘see through’ the fund to the beneficial investors and apply the right withholding tax relief to every holding. In many cases, the withholding tax relief can be applied at source, and from the launch date of the CCF. This means that we can help investors reduce costs and enhance investment performance from day one by reducing this unnecessary tax drag.

For investment managers, it makes sense to leverage the opportunity to use a fund structure that can deliver a significant multi-year boost to performance.  In addition, for those managers looking to attract tax exempt investors such as pension funds from multiple jurisdictions, the key benefit of this fund structure, is dividend withholding tax transparency.  As more jurisdictions look at introducing taxes that target non-domestic investors and a wider range of assets, the need for tax transparency will only increase.

To find out more about how a CCF could benefit you, please contact Ryan Tully, Business Development, Carne Group.

Disclaimer

Information contained herewith is for use only by (1) qualifying institutional investors (meaning Professional Clients as defined in Annex II of the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”)) who are also non-US persons (US persons are not able to invest in the Fund) and (2) current and potential investment managers of Carne Global Fund Managers (Ireland) Limited funds.

Carne does not provide tax advice. You should consult your own professional tax advisor. Tax rules are complex, change frequently and depend on the individual taxpayer’s situation.

Investors and potential investors should be aware that the CCFs are not open to US investors.