European Union: A Global Financial Transaction Tax By Any Other Name?

Keywords: financial transaction tax, FTT, EU

On 14 February 2013, the European Commission published a proposal for a financial transaction tax ("FTT") to be introduced in a subset of the EU: Germany, France, Spain, Italy, Belgium, Austria, Estonia, Slovenia, Slovakia, Portugal and Greece. The scope of the proposal is such that it is being termed a global financial transaction tax. Should it be adopted, the tax will come into effect on 1 January 2014.

Potential impact

If the proposal is adopted, it has the potential to impact all parties to financial transactions which have a link with one of the 11 participating countries ("the FTTzone"), irrespective of whether or not those parties are established in one of those countries. The exact impact will depend on the detail of the operational model of each business and the precise way in which the FTT is implemented by each country, but it is worth noting the following points:

(a) the tax is payable by all parties to a transaction, i.e. by both the buy and the sell side;

(b) the use of financial institutions as intermediaries will potentially bring the activities of non-financial institutions within the scope of the FTT;

(c) the rate will be at least 0.01% on the notional principal of derivatives and 0.1% of purchase price (or market value, if higher) on all other financial instruments;

(d) structured products, as well as shares, bonds and derivatives, are liable for the FTT;

(e) intra-group transfers of the right to dispose/the risk of a financial instrument are within the scope of the FTT;

(f ) given the complexity of many financial agreements which are likely to involve more than one "financial transaction" as defined in the proposal, some products and transactions will be subject to double or multiple taxation;

(g) the exchange of financial instruments will give rise to two transactions and thus two liabilities for taxation;

(h) repurchase agreements, reverse repurchase agreements and securities lending and borrowing agreements are within the scope of the FTT;

(i) the posting of financial instruments as collateral is within the scope of the FTT;

( j) additional collateral received in response to each margin call is likely to be regarded as a new financial transaction for the purposes of the FTT;

(k) many post-trade risk mitigation activities are within the scope of the FTT;

(l) there is no exemption for Treasury activities, such as hedging, nor for market-making;

(m) arrangements under which a custodian or depository receives the legal title to financial instruments could be liable for the FTT;

(n) sweep facilities could be liable for the FTT;

(o) modifications to any financial transaction which are regarded as material will be treated as a new financial transaction and liable for the FTT.

These points are explained further in the section below entitled Scope of the proposal.

Background and legal context

The Commission adopted a proposal for a Directive on an EU-wide FTT in 2011. It became clear throughout 2012 that there was not unanimous support for the FTT and, as unanimity is required for the introduction of fiscal measures in the EU, it was not possible for an EU-wide measure to be introduced. A subset of EU countries still wished to proceed, however, and it now appears likely that they will adopt a FTT through a little used procedure known as "enhanced cooperation".

Enhanced cooperation requires nine or more EU countries to participate, although other countries retain the right to join subsequently. Essentially, the procedure allows a subset of countries to proceed with a measure that does not have enough support to be adopted by all 27 EU countries, but there are legal conditions that must be satisfied in order for the procedure to be used. In particular, the measure must not: (i) undermine the internal market or economic, social and territorial cohesion; (ii) constitute a barrier to or discrimination in trade between EU countries; or (iii) distort competition between them. Enhanced cooperation must also respect the competences, rights and obligations of those EU countries that do not participate in it. Some of the non-participating EU countries have raised legal concerns that the conditions for enhanced cooperation are not fulfilled in the context of the proposed FTT. There is thus the possibility that some of the non-participating EU countries may seek to challenge the FTT before the Court of Justice of the EU.

Scope of the proposal

In summary, the FTT will be payable in respect of a "financial transaction" if:

(a) any party to a financial transaction is "established" in the FTT-zone and a financial institution is party to the transaction (acting as principal or agent), irrespective of where the transaction takes place ("the residence principle"); or

(b) if a financial instrument issued in the FTT-zone is traded anywhere and a financial institution is party to the transaction (acting as principal or agent), even if no party to the transaction is established within the FTT-zone ("the issuance principle").

Although one party to the transaction must be a financial institution (acting as agent or principal), the term iswidely defined. It includes the expected bodies (banks,investment firms, (re)insurers, UCITS, alternativeinvestment funds and alternative investment fundmanagers, SPVs, securitisation special purpose entities,regulated markets and any other organised trade venuesor platforms) and, surprisingly as there was an expectationthat they would be carved out, it includes pensionfunds and their managers. It also includes any otherbody which carries out a significant number of financialtransactions, meaning transactions which constitutemore than 50% of its average net annual turnover.

The term "financial transaction" is also drafted widely to include any of the following:

(a) the purchase and sale of a financial instrument (before netting or settlement);

(b) the transfer within a group of the right to dispose of a financial instrument and any equivalent operation implying the transfer of the risk associated with the financial instrument;

(c) the conclusion of derivatives agreements (before netting or settlement);

(d) the exchange of financial instruments; and

(e) repurchase and reverse repurchase and securities lending and borrowing agreements.

Material modifications of any of the above will be treated as a new taxable financial transaction. Modifications will be regarded as material where they involve a substitution of at least one party, alteration of the agreed consideration or the object or scope of the underlying transaction or where the original transaction would have attracted a higher tax had it been concluded as modified.

The term "financial instrument"1 essentially comprises shares, bonds and equivalent securities, money market instruments, units and shares in collective investment undertakings and other funds and derivatives. It also includes structured products which are defined as tradable securities or other instruments offered by way of a securitisation (within the meaning of the Capital Requirements Directive) or equivalent transactions involving the transfer of risks other than credit risk. As set out above, the term also effectively includes repurchase and reverse repurchase and securities lending and borrowing agreements.

In respect of each single financial transaction, a financial institution will be taxed in the following circumstances:

(a) if it is a party to the transaction, either acting for its own account or the account of another person;

(b) it is acting in the name of a party to the transaction; or

(c) the transaction has been carried out on its account.

Where a financial institution is acting for another financial institution, only the principal financial institution is liable for the tax. The extraterritorial provisions of the proposal raise questions as to enforceability which may be why the proposal provides that, where the tax is not paid on time, each party to the transaction, including persons which are not financial institutions, shall be jointly and severally liable for payment. Subsequent cancellation, save in the case of errors, will not remove the liability for taxation.

The proposal is in the form of a directive, which means that it must be implemented in each of the participating countries, but it contains minimum levels of taxation of 0.01% on derivatives and 0.1% on all other financial instruments. The tax on instruments other than derivatives will be set by reference to the purchase price or other consideration, or the market price if the actual price is less than the market price (in the case of intra-group transactions, for example), whereas the tax on derivatives will be fixed by reference to the (highest) notional amount referred to in the derivatives contract.

The tax is payable to the tax authorities of the country in which the financial institution is established. The proposal contains a specific anti-abuse rule which provides that the economic substance of a transaction will be taxed if an artificial arrangement has been put in place to avoid the "object, spirit and purpose" of the FTT.

When is a party to the transaction "established" in the FTT-zone?

The extraterritorial application of the FTT is based on the "residence" and "issuance" principles which are outlined above. The residence principle means that a financial transaction is liable for the FTT if one of the parties to the transaction is established within the FTT-zone. The term "established" is given a wide meaning and includes:

(a) a financial institution authorised by a participating country in respect of a financial transaction being carried out;

(b) seemingly a financial institution authorised outside the FTT-zone which is either an EEA-authorised institution using a "passport" to trade in the FTTzone or a third country institution permitted to trade in the FTT-zone2;

(c) a financial institution (or a natural or legal person that is not a financial institution) with its registered seat, permanent address or usual residence in the FTT-zone;

(d) a financial institution (or a natural or legal person that is not a financial institution) with a branch in the FTT-zone in respect of a financial transaction being carried out by that branch;

(e) a financial institution that is a party (as agent or principal) to or acting for a party to a financial transaction with another financial institution in the FFT-zone or with a party in the FTT-zone which is not a financial institution;

(f ) a financial institution that is a party (as agent or principal) to or acting for a party to a financial transaction covered by the issuance principle; and

(g) a natural or legal person who is a party to a financial transaction covered by the issuance principle.

What is outside scope?

The general day-to-day financial activities of citizens and businesses (such as loans, including corporate loans, mortgages, insurance transactions and deposits) are outside the scope of the FTT, as is the raising of capital through, for example, the issuance of shares and bonds on the primary market, and certain restructuring operations. Spot currency exchange transactions, public debt management and monetary policy are also excluded. The trading of debt instruments, including sovereign debt, on the secondary market is not, however, exempt. There is no liability to pay the FTT if there is no link between the economic substance of the transaction and the FTT-zone, however, uncertainty remains in the proposal as to what exactly this means.

What happens next?

Deliberations at EU level will now take place but it is a moot point as to whether the enhanced cooperation procedure permits the proposal to be substantially amended. All Member States may participate in those deliberations. The proposal for the FTT must be adopted unanimously but only the Member States taking part in enhanced cooperation are allowed to vote.

The extraterritorial nature of the FTT is already attracting a high degree of criticism. The provisions were included deliberately to strengthen anti-avoidance of taxation and to meet a perceived danger of transfers of business outside the FTT-zone but they are badly designed and drafted. There are legitimate legal concerns as to whether the proposal respects the enhanced cooperation procedure and the internal market of the EU. There are political concerns about the precedent that could be set for a two-tier EU and the damage that could be done to international tax cooperation. There are also practical concerns about enforceability. Finally, there are significant economic concerns focusing on whether a FTT is more detrimental than beneficial as it will lead to double/multiple taxation, could distort competition and could increase the burden on banks at a time when global markets remain fragile. There is a recognised argument that a FTT will reduce liquidity and investment and thus damage the real economy, business and investors. One of the objectives of the FTT appears to be punitive – to ensure that financial institutions "make a fair and substantial contribution" to the cost of the financial crisis – yet, putting aside the issue of culpability, this assumes both that financial institutions will be able and willing to absorb the FTT and that the revenue raised by the tax outweighs its detrimental effect.


Given that the intention is for the FTT to come into force on 1 January 2014, you should consider the effect that the FTT could have on your business so that you can then consider issues such as what steps you can take to limit your exposure to the FTT, how you could absorb or pass on the FTT and what new systems and procedures you will need to put in place.

If you wish to have input into the scope of the FTT, you should consider lobbying EU Member States, including the governments of both the participating and nonparticipating countries. You will need to consider objective arguments against the FTT and present them as soon as possible as deliberations will start imminently. The positions taken by the non-participating EU countries will be influenced in large part by your judgments on how exposed your sectors and economies will be to the FTT via its extraterritorial provisions. The new impact assessment (also dated 14 February 2013) has clearly been constrained by the lack of public data and, accordingly, the non-participating countries are likely to welcome better information on the likely geographical incidence of the tax.

Finally, you may wish to consider your legal position. There are significant legal concerns as to whether the procedure for enhanced cooperation has been met and whether the proposal satisfies the required internal market objective or actually undermines the free movement of capital. It would be possible for natural and legal persons to challenge the FTT directive after it has been adopted if they can show that it "is of direct and individual concern to them" before the Court of Justice of the EU. It is also possible in some circumstances for trade associations to bring a challenge. There is an extremely tight timescale for challenge which cannot be extended (two months from the publication of the legislative act in the Official Journal3) and there is case law which states that if a person has standing to challenge a legislative act, has knowledge of it and of its being of direct and individual concern to him but does not challenge within the time-limit, that act becomes definitive against him and he cannot later challenge the legality of that act – even in proceedings before the national courts of the countries which implement that decision.


1 The term "financial instrument" in this regard is defined by a cross-reference to the Markets in Financial Instruments Directive. The instruments within the scope of this provision are essentially the same instruments covered by the general definition of financial instruments save that the derivatives must be traded on organised trade venues or platforms.

2 This provision is not limited to transactions carried out within the FTT-zone using the passport but it is not clear whether this is what is intended or whether this provision attempts to deem financial institutions to be established within the FTT-zone simply because they have a passport (or third-country authorisation) to trade within the zone

3 The action would be brought before the General Court for annulment under Article 263 of the Treaty on the Functioning of the EU. The Court's Rules of Procedure extend the 2-month time limit slightly by adding an extra 14 days to make the application where the challenged measure is published (rather than notified) and 10 days are also added "on account of distance".

Originally published February 3, 2013

Visit us at

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.