On 28th September the European Commission published its draft directive implementing a common financial transaction tax ('FTT') for EU member states.
The FTT would apply to
- to all financial transactions
- in financial instruments
- to which a financial institution is a party
- if one or more parties are established in the EU
Financial transactions will include all sales and purchases of financial instruments, including repurchase agreements and stock lending arrangements, and intra group transactions, but will not include the issue of new shares
Financial Instruments includes stock, shares and units in collective investment schemes and many derivative products such as swaps, futures and options
Financial institutions include investments firms, credit institutions, banks, pension funds, pension fund managers, collective investment entities and insurance companies.
A financial institution is established in an EU state if it is registered there or its activities are authorised by the regulators in that state or it has a permanent address or branch in that state. However, the FTT will apply even if the financial institution is not established in the EU if it is a party to a financial transaction with another party who is so established. Thus a US investment bank transacting with a UK business which is not a financial institution can be subject to the tax.
The tax is set at a minimum of 0.01% for transactions in derivatives and 0.1% for all other transactions in financial instruments, although governments in each state can set a higher rate. The rate is chargeable on the consideration paid, or market value if the transaction is not arms length or the consideration is below the market value. The tax is due when the transaction occurs and in the case of electronic transactions must be paid effectively on that date, and for all other transactions, must be paid within 3 business days.
As the directive prohibits governments from levying any other taxes on financial transactions this would likely mean the end of 0.5% stamp duty charge on share transactions. Commentators suggest it is unlikely the government would set the rate for non derivative transactions as high as 0.5% so there is likely to be a benefit to investors in shares. In addition, transactions such as share transfers on an acquisition between two businesses that are not financial institutions would no longer attract stamp duty.
The proposals fall under EU treaty provisions which normally require unanimity, but even if a country exercises a veto the proposals may still go forward if a minimum of 9 states support its initial introduction under the enhanced cooperation procedures. States have until 31st December 2013 to publish implementing legislation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.