In another blow to the controversial proposed financial transaction tax (FTT), the EU Council’s legal advisers have recently concluded that aspects of the FTT may not be lawful.

On 10 September 2013 the Financial Times reported on and published on its website a confidential, non-binding opinion from the Legal Service of the EU Council which examined Article 4(1)(f) of the FTT (under which a financial institution outside of the FTT zone is subject to the FTT when it transacts with a counterparty in the FTT zone).  The memo, dated 6 September 2013, concluded that aspects of the FTT in the form proposed:

• Exceed Member States’ jurisdiction for taxation under the norms of international customary law
• Are not compatible with the EU Treaty as they infringe upon the taxing competences of non-participating Member States
• Are discriminatory and likely to lead to a distortion of competition to the detriment of non-participating Member States

In response to the leaked document, the European Commission issued a very strong defence of the FTT, stating that it strongly disagreed with the Council’s lawyer’s opinion on the FTT, noting that it only covered the issue of residence implied through Article 4(1)(f) of the proposed FTT Directive.

The UK lodged a formal complaint on the FTT before the European Court of Justice in Luxembourg on 19 April of this year. Its complaint also focusses on Article 4(1)(f) of the draft directive, and the leaked memo will certainly add weight to the UK’s arguments.

The FTT has been a political hot potato in the EU. Now that the EU Council has been advised that aspects of it may be unlawful, it is probable that the scope of the FTT could be narrowed, despite the EU Commission’s steadfast support of its original proposal.