Better Finance and DSW

Double taxation persists on securities income amid EU tax harmonisation gap: survey

The EU lacks harmonisation in the taxation of income from securities, leading to the possibility of double taxation for cross-border investment income, according to a paper published by Better Finance and DSW. Photo: Shutterstock

The EU lacks harmonisation in the taxation of income from securities, leading to the possibility of double taxation for cross-border investment income, according to a paper published by Better Finance and DSW. Photo: Shutterstock

Bilateral conventions are currently used in the European Union to address withholding taxes on dividends, but they suffer from inconsistencies and difficulties in application across member states, resulting in challenges related to double taxation and administrative barriers, finds a Better Finance and DSW survey.

Over 90% of European investors find the refund procedures for withholding tax (WHT) on cross-border dividend income difficult, with nearly 70% incurring costs, according to a recent survey conducted among 3,000 investors across the EU.

Additionally, the process of reclaiming WHT requires substantial knowledge and compliance with refund procedures, while delays further exacerbate the issue. As a result, investors’ confidence in engaging in cross-border investment is undermined.

The survey, conducted between December 2022 and January 2023 by the lobby groups Better Finance and DSW, aimed to assess the challenges faced by investors in the EU regarding equity income from companies based in other EU member states, particularly regarding WHT on cross-border dividends.

In Belgium, an example of double taxation within the EU can be seen. Despite Belgian investors obtaining or reclaiming a reduced withholding tax rate through the bilateral tax treaty with France, the ‘Belgian-French Tax Treaty to avoid double taxation’ effectively results in double taxation.

Belgian residents who hold shares of French companies experience higher taxes on dividends received from French issuers compared to dividends received from Belgian companies. As a result, Belgian residents face a significantly heavier taxation burden than French residents receiving dividends from the same French issuer.

Investor challenges

A significant majority of European investors, more than 90%, find the procedure for reclaiming WHT to be difficult. Among investors, about 63% handle the WHT reclaim process independently, while approximately one-third rely on their banks’ services, and a small percentage involve third-party providers like tax advisors or private service providers.

Regardless of the approach chosen, three-quarters of respondents face difficulties in the WHT reclaim process.

In terms of timing, nearly half of the respondents wait for over six months to request a refund, and more than a fifth (21%) need more than a year to obtain the WHT refund.

Furthermore, approximately 70% of cases incur costs that are borne by the investors, with close to 10% of investors facing costs exceeding €100. This amounts to at least 6.3% of the surveyed investors incurring fees exceeding €100.

Disappointingly, only 30% of investors who engage in the WHT reclaim process successfully obtain the refund, with the majority either not initiating the process or failing to recover any WHT.

Investor sentiment

Approximately 27% of the respondents who engage in the WHT reclaim process stated that they are not discouraged from investing abroad. However, more than 30% of investors expressed their intention to stop purchasing foreign EU shares due to the challenges posed by cross-border WHT issues.

While professional services slightly enhance the success rate and duration of the WHT procedure, they do not substantially improve the overall ease of the process. In comparison to Switzerland or the United States, WHT procedures across EU countries are deemed more complex and less efficient.

Policy recommendations

To improve the efficiency of cross-border withholding tax procedures, several measures should be implemented, recommended the report.

First, standardised and harmonised refund request forms should be adopted by the tax administrations, ensuring a uniform language across the EU. Additionally, there should be standardised document requirements to establish the right to reclaim WHT paid in another member state, with a tax residence certificate and deposit statement considered sufficient proof.

Moreover, to streamline the process, a central repository at the EU level should be established to store tax residence certificates. This would facilitate easy access and verification of relevant documents.

Furthermore, an e-request system for tax residence certificates should be implemented, enabling investors to swiftly obtain these certificates online and undergo digitalised verification.

Digitalisation of WHT refund procedures, such as e-filing, online refund status monitoring, e-document sharing and online communication of outcomes, would enhance transparency and efficiency throughout the process, the lobby groups argued.

Creating a single web portal, functioning as a one-stop-shop, would significantly simplify the refund claim process for investors. This portal should allow investors to log in and submit refund claims, regardless of the source member state, using standardised forms.

This centralised approach would streamline the procedure and eliminate unnecessary complexities.

The report also recommended that in cases of delays in receiving refunds, interest should accrue to compensate for the inconvenience caused. A limited period should be set for handling WHT reclaims to ensure prompt resolution.

The full report is available here.