The problem: double taxation and fragmented systems
When investment income, such as dividends or interest from securities, is paid across borders, it is typically subject to withholding tax in the country where the security was issued. This can result in double taxation, as the beneficiary must also declare the income in their country of residence.
While mechanisms exist to mitigate this—namely relief at source (pre-documentation to obtain an exemption) or tax reclaims based on bilateral treaties and European Court of Justice (ECJ) rulings—the current procedures are “highly inefficient,” said Patrice Fritsch, tax partner at EY Luxembourg.
Why do individual investors lose out?
According to the expert, recovering overpaid tax is hindered by legal complexity, language barriers and high administrative costs. Given the time and effort required to deal with foreign tax administrations, only a “small portion” of eligible tax is reclaimed.
This gap mainly affects individual investors, for whom reclaiming a few dozen euros is not worth the cost, while institutional investors can justify the effort for larger sums.
Harmonisation and digital tools
To address these issues, the European Commission introduced the Faster directive (Faster and Safer Tax Excess Relief). The EU’s main objectives are to harmonise and digitise reclaim procedures, making them quicker and more accessible to a wider range of beneficiaries—thereby boosting the purchasing power of European citizens. Member states must transpose the directive by 2028, with full application from 1 January 2030.
The directive introduces two tools intended to streamline the withholding tax landscape. First, the Electronic Tax Residence Certificate (eTRC) will require member states to set up automated online systems enabling certificates of tax residence to be requested and issued within a short timeframe—a development welcomed by the Luxembourg Banker’s Association (ABBL). Second, the directive establishes certified financial institutions (CFIs), allowing financial institutions to obtain certification to manage the entire reclaim process and document the payment chain.
The challenge of implementation
Participation as a CFI is mandatory for large entities, such as those with more than €30bn in deposits or central securities depositories, but remains voluntary for smaller players. Fritsch expects this status to become a major competitive advantage, as investors may prefer institutions that can help prevent double taxation efficiently.
The EY expert expects that full harmonisation of documents, timelines and processes will not happen immediately. Each country may retain “local flavours” in documentation requirements or refund delays, which can range from weeks to several months.
For CFIs, implementing Faster represents a significant logistical and technological challenge. As a result, CFIs will need to invest in systems to manage investor data, consolidate sub-accounts and industrialise information flows across the payment chain.
While this increases compliance costs, Fritsch expects that it will also reduce the risk of fraud (such as Cum-Cum schemes) by providing greater transparency regarding the ultimate beneficiaries.
Faster vs. GDPR
Fritsch does not expect Faster to increase General Data Protection Regulation (GDPR) risks. Cross-border data exchanges already flow securely via the Common Reporting Standard (CRS) and the US Foreign Account Tax Compliance Act (Fatca). The directive uses the same established banking and data exchange rules as existing processes. This treatment of data is not problematic and ensures that beneficiaries receive the tax refunds they are legally entitled to.
Convergence of tax rates not in the cards
Standardisation is not currently legislated, as states maintain sovereignty for strategic and funding reasons. While not excluded for the future, Fritsch stated that rates currently vary between 15% and 35%. However, a natural trend toward a 20-25% range is emerging, suggesting informal convergence despite the absence of a unified European tax rate.
Luxembourg well positioned
Luxembourg is particularly well positioned to benefit from Faster, given its status as a global hub for investment funds. Fritsch suggests that the country is already more “industrialised and operational than many other jurisdictions,” owing to its long-standing involvement in funds and private banking. As a result, it is expected to have both a higher proportion and a higher absolute number of CFIs than other member states.
Ultimately, while the directive entails high upfront costs, Fritsch emphasises that it should increase assets under management as reclaimed funds are reinvested—delivering a longer-term benefit for asset managers, depositary banks and individual investors alike.
A modified version of this article was written for the Wealth Management and Private Banking supplement to the March 2026 issue of Paperjam magazine, published on 24 February. The content is produced exclusively for the magazine. It is published on the site to contribute to the full Paperjam archive. Click this link to subscribe to the magazine.
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