ESMA makes proposals to help prevent and detect WHT reclaim schemes

ESMA’s inquiry has highlighted that WHT schemes are primarily a tax related issue and so a response should be mainly sought within the boundaries of the tax legislative and supervisory framework. As part of its inquiry, ESMA has identified a number of measures adopted by various Member States to limit the risk of WHT reclaims schemes being pursued.

In its Report, ESMA recommends legislative change to remove the legal limitations on NCAs exchanging information acquired from other NCAs with tax authorities. Additionally, a common legal basis should be developed to ensure a consistent and convergent approach on the exchange of information directly acquired by NCAs in their supervisory activity with tax authorities.

Moreover, ESMA has identified best practices extracted from the experience of those NCAs that, thanks to an extended remit under national legislation, carry out supervisory activity for WHT schemes.

Steven Maijoor, Chair, said: 

“Today’s Final Report is the result of almost two years of thorough legal and economic analysis by ESMA’s experts. While halting these schemes seems to be primarily dependant on changes to tax legislation, ESMA considers that increased cooperation between NCAs and tax authorities across the EU would be an important step in identifying and deterring abusive schemes.”

The Report builds on ESMA’s Preliminary findings on multiple withholding tax reclaim schemes and outlines the general functioning of dividend arbitrages, Cum/Ex, Cum/Cum and WHT reclaim schemes, describes the experiences of NCAs in their respective jurisdictions and gathers information on the status of criminal investigations across the EU. The Report also considers the schemes from the perspective of regulated firms’ obligations under the MiFID II legal framework, with particular reference to the obligation for investment firms to ensure that they act honestly, fairly and professionally and in a manner which promotes the “integrity of the market”, but also to the requirements on the suitability of their management bodies, whose members are required to act with integrity.  

ESMA has also considered whether any potential solution to contribute to the detection and prosecution of WHT reclaim schemes could be achieved through an amendment to the Market Abuse Regulation (MAR), and included the outcome of such analysis in a dedicated section in its technical advice to the EU Commission on a potential review of MAR. See here.

Next steps

The Final Report will be submitted to the European Parliament.