With fast digital procedures, the EU Commission wants to take away investors’ concerns about double taxation.
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Frankfurt Like almost all Europeans, Germans invest primarily in stocks and bonds from their own country. The reason for the lack of diversification is the current double taxation. Taxes are levied twice on dividends or interest received abroad: firstly, the withholding tax abroad and secondly, the final withholding tax in Germany.
Although investors can have the amounts paid twice reimbursed, but this is very time-consuming. Now the EU Commission is taking on this problem.
On Monday she published her idea for a new guideline that is intended to simplify the procedure using digitization. “This long-awaited proposal will help to reduce the problems with double taxation of dividends,” says Christiane Hölz, Managing Director of the investor association DSW. The EU Parliament and Council still have to approve the proposal. The directive could then be transposed into national law by the EU member states from 2027.
The reform is necessary because the existing double taxation agreements do not work in practice. According to these agreements, foreign dividends and interest are to be subject to a maximum of the same withholding tax as income from German securities.
But in many countries such as France, Norway, Italy or Switzerland, the tax authorities continue to collect the full withholding tax, and German investors have to apply for the refund themselves. To do this, they must submit a tax residence certificate from the German tax office, which is sometimes only sent out weeks after the application has been submitted.
They then have to fill out the application forms for the respective country (often on paper). Some banks will help with that. However, the fees are sometimes over 100 euros, so this is not worth it, especially for small investors.
Withholding tax problem costs investors 5.17 billion euros annually
For these reasons, not even a third of all investors in Europe try to reclaim the excess withholding tax paid. This is the result of a survey by DSW and the European investor association Better Finance. Less than half of them are ultimately successful (46 percent). The misery costs European investors 5.17 billion euros per year.
As part of the digitization proposed by the EU Commission, a common digital proof of tax residence will be introduced. It should be available within a day and be valid for a year.
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In addition, two fast-track procedures are to be introduced. In the case of “tax relief at source”, the foreign tax authorities only levy the reduced withholding tax rate in accordance with the double taxation agreement. Under the “Fast Refund Scheme” the withholding tax is initially fully withheld but the overpaid amount is refunded upon request within 50 days of the date of such payment.
Thomas Rappold does not believe that the first method will prevail. He is head of the fintech division, which handles reimbursements for private investors and banks. “In practice, most countries will probably stick with the fact that investors still have to take action themselves to reclaim the tax,” he believes.
Expedited procedures only possible via banks
At the same time, the banks must enter all information on withholding tax payments in a national register. This is being introduced in response to the cum-ex and cum-cum tax scandals, in which investors had multiple tax refunds and, according to the Commission, caused damage of 150 billion euros.
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However, the Commission’s idea has a weakness. DSW criticizes that the proposal stipulates that the reimbursement procedures must be processed via the bank chain. This would continue to incur high costs for investors. “We therefore demand an exemption from the obligation to process refund applications via this chain if the tax amounts do not exceed 5,000 euros,” demands Hölz. In addition to the fast-track procedure, the previous reimbursement method remains possible on your own.
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