Streamlining withholding tax relief: Impacts on asset servicing and the revolutionary role of FASTER in cross-border investment

Introduction

Council Directive (EU) 2025/50 of 10 December 2024 on faster and safer relief of excess withholding taxes - the FASTER Directive - is poised to revolutionize the processing of withholding tax (WHT) relief for cross-border transactions. As global investment continues to expand, the complexities surrounding WHT compliance have become increasingly challenging for financial institutions, insurance companies, investment funds and investors alike. FASTER aims to simplify these processes, remove tax barriers, and harmonize WHT reclaim procedures for all investors, whilst strengthening them against risk of tax fraud and tax abuse. This article explores the concept and objectives of FASTER, what the asset management industry needs to consider, the challenges ahead, and the actions stakeholders must take to ensure compliance and capitalize on opportunities.

Concept and objectives of FASTER

FASTER is designed to address the inefficiencies and delays associated with claiming WHT relief. Its primary objectives include removing tax barriers that hinder cross-border investments and creating a standardized approach to WHT relief across jurisdictions. This harmonization is intended to make it easier for investment funds and investors to navigate the complexities of tax compliance.

Member States are required to transpose the FASTER Directive into national law by 28 December 2028. The industry is anticipated to apply the FASTER provisions from 1 January 2030.

The Directive’s ambition is to democratize access to WHT mechanisms by introducing a digital Tax Residency Certificates (eTRC) and fast-track procedures (quick refund or relief at source), while shifting due diligence and reporting obligations to intermediaries with direct investor relationships. This shift will necessitate significant evolution in tax servicing for many financial institutions. It includes the chain of revenue payments that are composed of investment fund custodians and sub-custodians.

The FASTER Directive foresees an obligation for certain institutions to register as Certified Financial Intermediaries (CFIs) if they meet the definition of a "large institution" and handle dividend (and, where relevant, interest) payments or act as Central Securities Depository (CSD) providing WHT agent services. A "large institution" is an institution that is either a Global Systemically Important Institution, or has been identified as an Other Systemically Important Institution, or is one of the three largest institutions in terms of total value of assets in the Member State where it is established, or has total assets which value equals to or is greater than EUR 30 billion. Other entities acting as financial intermediaries, such as CSDs, credit institutions, investment firms or certain third-country entities, may apply for registration as CFIs provided they meet specific conditions. Once registered, CFIs are required to report, within the prescribed deadline, a set of information including details about themselves, the recipient and the payor of the dividend or interest and information regarding the application of anti-abuse measures fulfilled by them, 

What the industry needs to think about and what stakeholders need to do

As the FASTER Directive approaches implementation, the financial industry must consider several key factors. Engaging with all stakeholders, including investors and sub-custodians, as well as the sub-custodians is crucial to ensure a clear understanding of the requirements and processes involved in FASTER. Financial institutions, asset managers, and custodians must foster collaboration to navigate the complexities of compliance effectively.

Documentation requirements

One of the critical aspects of FASTER is the documentation requirements along the payment chain. Each participant in the payment process – be it the investor, the fund, the custodian, sub-custodian, or the initial withholding agent – must maintain accurate and comprehensive records. For instance, investors need to provide documentation such as eTRCs and a declaration to claim tax treaty benefits. The fund must collect and verify this information before processing any payments. Custodians, acting on behalf of the fund, will need to ensure that they have all necessary documentation to report to the initial WHT agent, which includes beneficiary details and transaction amounts.

The impact of FASTER is particularly significant for funds that are transparent from a tax perspective. FASTER could help fund investors benefit from fast-track WHT reliefs. In this context, the Registered Owner is the fund, but this does not necessarily align with the rights of the beneficial owner. For transparent funds, this means that CFIs seeking relief must obtain certification at two levels: from the fund as Registered Owner and from the investor(s). For the collection of the documentation from the investor(s), the asset managers may need to define the data to be collected from transfer agents and distributors, such as investment platforms, retail banks, and private banks.

Technology investment

Moreover, organizations need to invest in technology solutions that facilitate efficient data management, interfaces for data and document exchanges, reporting, and compliance with FASTER regulations. Automating processes can significantly reduce manual errors and enhance operational efficiency. Establishing robust systems for collecting and reporting necessary documentation, such as beneficiary information and transaction data, will be essential for compliance.

Challenges for the industry and what they need to work on starting from now

While FASTER presents significant opportunities, it also poses challenges that the industry must address. The requirement for CFIs to report detailed information about beneficiaries and transactions adds complexity to compliance efforts. Institutions must develop clear processes to manage this complexity effectively. Volumes are significant. 

eTechnology, organization, legal and people impacts will become material. If timing is not yet a stress, starting projects early and defining future level of services, will help to plan and anticipate changes to become ahead of the market for such strategic project. 

For example, the need for accurate and timely data collection and reporting will be critical. Financial institutions must enhance their data management capabilities to ensure they can meet the requirements of FASTER. This includes implementing systems that can track and store documentation related to each transaction, such as proof of tax residency and eligibility for tax treaty benefits, from many sources and most of their stakeholders.

Ongoing training for staff will also be essential, as FASTER introduces new processes and requirements. Organizations must invest in educating their teams about the initiative and its implications for their operations. For instance, staff will need to understand how to transform processes, handle documentation from investors, such as the specific forms required for tax relief claims, and how to communicate effectively with custodians and tax authorities.

As the landscape evolves, institutions that do not register as CFIs may find themselves at a competitive disadvantage. For example, if an asset servicer or intermediary fails to register as a CFI, it may struggle to provide the same level of service as competitors who can efficiently process WHT claims, ultimately losing clients to those institutions. Being ready at start is a significant competitive advantage.

Conclusion

The FASTER initiative represents a transformative shift in the landscape of WHT compliance, offering the potential for greater efficiency and transparency in the tax relief process. As the industry prepares for implementation, stakeholders must engage in impact assessments and proactive project management, invest in technology, and enhance their data management capabilities. By addressing the challenges ahead and embracing the opportunities presented by FASTER, financial institutions can position themselves for success in a rapidly evolving regulatory and business environment. 

Ultimately, FASTER aims to create a more streamlined and accessible framework for WHT relief, benefiting both investors and institutions alike.