The European Commission has come up with guidelines to make it easier for investors to reclaim withholding taxes linked to investments in a foreign country.

Withholding tax (WHT) is taken at source in the EU country where investment income is generated, but is often taxed again in the member state where the investor is resident.

This can result in double taxation, and although investors have the right to claim a refund when this occurs, in practice refund procedures are “currently difficult, expensive and time-consuming”, the Commission said.

The overall cost of withholding tax refund procedures has been estimated at €8.4bn a year – a combination of the costs of reclaim procedures, opportunity costs (delayed refunds meaning that the money cannot be used for other purposes), and investors choosing not to pursue refunds because of the complexity involved.

Withholding tax rules can be particularly complex for smaller investors, with some of them not even pursuing possible tax repayments, according to the Commission.

“Today’s Code of Conduct should help investors to avoid long delays and high costs”

Valdis Dombrovskis

Its guidelines are in the form of a code of conduct intended to result in quick, simplified and standardised procedures for refunding taxes where appropriate.

PensionsEurope has campaigned for improvements to withholding tax refund processes for some time and said the code of conduct was “warmly welcome”. Member states should make a strong political commitment to respect it, said Pekka Eskola, senior economic adviser at the Brussels-based umbrella association.

He told IPE: “I would like to thank the European Commission for the excellent co-operation with PensionsEurope during the last years on removing the withholding tax refund barriers to cross-border investment in the EU.  

“The WHT refund processes are complex, expensive and long-lasting. Often, they can last even 10 years and cost half of the expected refunds, as costly tax advice in foreign languages is needed. Since the legal outcomes are uncertain, given that the legal recourse involves several levels of jurisdiction, often pension funds do not assert their justified reclaims.”

The European Commission

All withholding tax barriers to cross-border investments should be removed, he added.

This meant that member states should respect the case law of the EU Court of Justice, reciprocally and automatically recognise pension funds, and simplify their processes.

The Commission’s code of conduct provides an overview of problems faced by cross-border investors and explains how more efficient tax procedures can be put in place.

It sets out a range of practical steps member states can take, such as establishing a single point of contact in tax administration to deal with questions from investors on withholding tax.

Valdis Dombrovskis, vice-President in charge of financial stability, financial services and capital markets union, said the code of conduct was another step towards a single market for capital.

“Today’s code of conduct should help investors to avoid long delays and high costs when claiming withholding tax refunds,” he said. “We will now work closely with member states to make sure that the new code of conduct delivers tangible results.”