Proposed EU financial transaction tax not legal, say EU Lawyers

The legal opinion said that the 'residence principle', which governs when the tax will apply, is not compliant with EU law.

The FTT is a proposed tax which the European Commission wants to apply to transactions in financial instruments involving financial institutions where at least one party to the transaction is established in a participating member state (the FTT Zone) or where the transaction involves financial instruments issued in the FTT Zone.

The European Commission outlined plans for an EU-wide FTT in 2012 but had to abandon them after there was insufficient support for the proposals. However, under the 'enhanced cooperation' procedure a minimum of nine member states are allowed to go forward with their own plan for FTT, and eleven participating member states are proceeding under this process. They are: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.

The UK government opposes the introduction of an EU FTT on the basis that any such tax would have to be global to stop traders simply routing their deals to financial centres outside the EU. It has begun a legal challenge to the plans in the European Court of Justice.

John Christian, a tax expert at Pinsent Masons, the law firm behind Out-law.com said that if the tax was introduced the UK's financial sector would still be affected by FTT even if the UK did not participate in the tax because if a UK financial institution were to trade with an institution located in another participating member state the tax would be payable.

Under the proposals the 'residence principle' would apply the tax on a transaction regardless of where the transaction took place, but on the basis of one of the parties to the transaction being resident in the FTT Zone.

"The problem with FTT in its current form is that its reach is much wider than just the FTT Zone. Who is party to the transaction is what counts, not where it takes place. This means that if a financial institution involved in the transaction is established in the FTT Zone, or is acting on behalf of a party established in this zone, then the transaction will be taxed, regardless of where it takes place in the world" Christian said.

According to the Financial Times, which has seen a copy of the leaked opinion, the opinion states that the 'residence principle' "exceeds Member States' jurisdiction for taxation under the norms of international customary law" and "infringes upon the taxing competences of non participating Member States". The opinion also states that the principle "is discriminatory and likely to lead to distortion of competition to the detriment of non participating Member States".

The legal opinion is not binding, but John Christian said that it would be "a set back for the new tax and a boost to the UK's challenge".