Osborne wanted to block the introduction of an FTT, claiming that it will affect countries beyond the borders of the 11 EU member states that opted to introduce the tax.
The UK government believes the 11 countries in favour of the new tax, including France, Germany, Spain and Italy, overstepped the reach of the enhanced cooperation procedure (ECP) by requiring non-participating countries to assist in taxing transactions in their jurisdictions.
The decision by the European Court of Justice (ECJ) gives full legitimacy to the 11 EU member states in using enhanced cooperation to proceed with a common FTT.
“The Commission has always been confident that the decision for enhanced cooperation on the financial transaction tax was legally sound,” said Emer Traynor of the European Commission. “We hope that today's decision will give added impetus to the 11 member states in their negotiations on the common FTT.”
“Before we put forward the proposal, we ensured that enhanced cooperation would not have any negative impact on non-participating member states,” added Traynor.
The ECP allows a minimum of nine member states the power to establish new legislation without other member states being involved, as long as it advances integration and cooperation within the EU.
The court’s decision authorises the establishment of enhanced cooperation, but it is unable to offer any decision on any substantive elements in relation to the FTT itself, as the proposal is yet to be finalised.
Challenges over the substantive issues cannot be examined until the tax is introduced.
“All the ECJ has done is rule that this challenge is premature,” said Mark Persoff of EY. “We still do not know whether the EU FTT will come in and, if it did, what it would look like.”
“The decision by the ECJ effectively puts the UK's legal challenge in cold storage and the focus will now be back on the political negotiations between the participating 11 EU member states,” added Persoff.
The 11 member states have yet to reach an agreement on some of the most basic aspects of the tax, but it is likely to apply a 0.1% tax on shares and bonds, with a 0.01% levy on derivatives.
Finance ministers from the 11 EU member states are scheduled to meet in Brussels next week to discuss the substantive issues surrounding the FTT.
"It remains to be seen what kind of FTT the participating countries will be able to agree on,” said
Gary Richards, chair of the Law Society's Tax Law Committee. “The Treaties are clear that any substantive law arising out of enhanced cooperation must respect the rights of those countries, which have decided not to participate.
“If the final FTT proposal forces a degree of involuntary participation on those countries, a legal challenge to that piece of legislation would remain on the table as an option irrespective of today's ruling."
Given the potential impact the tax could have on London’s financial hub, it is likely that further challenges will arise once the FTT is finalised.
The European Council’s legal service has expressed concerns over the proposal, as it stands, to meet the requirements of EU treaties.
“If the tax is unable to adhere to such treaties, it will most likely face further challenges by other member states,” said Ashley Greenbank of Macfarlanes LLP. “It has punted the decision down the road and leaving it open for the UK or any other state to challenge the substantive tax when it is finally introduced.”
Those in favour of the proposal are satisfied with the court’s decision.
“George Osborne has gone to Europe to bat for the bankers, but he's been bowled first ball,” said David Hillman of the Robin Hood Tax campaign.
"Complaining that the City will be hit by a European FTT is a clear case of double standards - almost half of the £3 billion revenue from our own FTT, the stamp duty on shares, comes from non-UK residents," added Hillman.
Neal Todd of Berwin Leighton Paisner, said: “The UK has lost a battle, but certainly not the war”.
