|Bob van der Made, PwC|
The legal opinion was prepared by the EU Council's Legal Service in response to a request from member states. The role of the EU Council's Legal Service is to provide advice to the Council and to represent the Council in all litigation. The opinion focuses on the compatibility of Article 4(1)(f) of the proposed directive with EU law. Article 4(1)(f) contains one of the establishment tests which is used to determine whether a financial institution is subject to the EU FTT in an ECP-11 country. It applies where a financial institution is physically located outside the ECP-11 zone but transacts with a counterparty located within the FTT-zone. The opinion concludes that Article 4(1)(f) exceeds member states' jurisdiction for taxation under international law, infringes on the taxing competences of non-participating member states and is discriminatory against them. The opinion does not comment on the legality of any other aspects of the proposed directive.
The opinion has been prepared at the request of the ECP-11 following concerns raised at the April 16 2013 meeting of the Working Party on Tax Questions – Indirect Taxes (EU FTT). The pressure on the ECP-11 to request the Council's Legal Service for a legal assessment became simply too big when the UK launched a legal challenge to the European Court of Justice at around the same time on the use of the enhanced cooperation procedure. Other non-ECP-11 also voiced concerns over the extra-territorial scope of the proposal.
While the opinion is non-binding, the views of the EU Council's Legal Service are influential and the ECP-11 is likely to take the content of the opinion into account as negotiations under the enhanced cooperation procedure move forward. Importantly, the EU Council's Legal Service on this EU law point contradicts the European Commisson's Legal Service's official views.
The legal opinion follows a general slowdown in the negotiations in recent months as it has become apparent that the 11 member states who have signed up to the enhanced cooperation procedure are struggling to reach a consensus on what form the tax should take.
While the legal opinion is not binding on member states, it is likely to provide the ECP-11 with a welcome piece of advice on the red line not to be crossed ahead of the next round of technical negotiations, and to get out of the current impasse. Indeed, the road toward a scaling back of the scope of the tax now seems to be cleared.
Financial institutions need to continue to closely monitor developments in the coming weeks and months. The overall direction of travel should become clearer once the plans of an incoming German federal government are presented. It is expected that if the EU FTT is expressly mentioned by a new German government which includes the Social Democratic Party (or perhaps the Greens), the EU FTT project may be up for a re-start. If not, the Commission's proposal may be shelved.
© 2019 Euromoney Institutional Investor PLC. For help please see our FAQ.