EU court dismisses UK's "premature" legal challenge to proposed financial transaction tax

Out-Law News | 01 May 2014 | 12:38 pm | 2 min. read

The UK's legal challenge to a proposed tax on financial transactions involving at least one of 11 participating EU member states has been dismissed by the trading bloc's highest court.

In its ruling, the Court of Justice of the European Union (CJEU) said that the UK's arguments against the proposed financial transaction tax (FTT) were "directed at elements of a potential FTT" rather than the European Commission's decision to allow participating states to develop one under the 'enhanced cooperation' procedure. It said that the judgment did not prevent the UK from issuing a subsequent challenge against the proposals themselves once these were fully developed.

"No-one will be surprised at the CJEU's decision: it could have gone either way, but the court has taken the 'safe' political option of deferring the battle," said tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com.

"What now? Well, it's not over yet – the participating member states have yet to agree on the finer details and the UK can have another go during the next stages of trying to make the FTT law," she said.

The European Commission announced its plans for an EU-wide FTT in 2011, but had to abandon them after there was insufficient support for the proposals. However, under the 'enhanced cooperation' procedure, a minimum of nine member states were able to take their own plans for an FTT forward and 11 countries now plan to do so. They are Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.

The UK has opposed the introduction of an EU-specific FTT from the start of the process, on the basis that any such tax would have to be global to stop traders from simply routing their deals to financial centres outside of the EU. While acknowledging in its submission to the CJEU that its challenge could be considered premature, it decided to bring an action for the annulment of the authorisation for enhanced cooperation "as a precaution ... in order to preserve its right to challenge" future implementing measures.

In its submission to the court, the UK argued that the plans as currently proposed do not respect the rights of countries that are not participating in the FTT, as they will apply to UK firms trading with businesses based in a participating state. The proposed tax would apply where financial instruments such as shares, bonds, securities and derivatives are traded between banks where at least one party is established in a participating member state regardless of where the transaction itself takes place (the 'residence' principle); or where that financial instrument is issued in a participating member state (the 'issuance' principle).

The CJEU rejected a counter-argument by Germany that the UK's challenge was "manifestly inadmissible", but said that its challenges were based on principles of taxation that were "not in any way constituent elements" of the enhanced cooperation authorisation. A review of the authorisation itself "should not be confused with the review which may be undertaken, in the context of a subsequent action for annulment, of a measure adopted for the purposes of the implementation of the authorised enhanced cooperation", it said.

In addition, "the question of the possible effects of the future FTT on the administrative costs of the non-participating member states cannot be examined for as long as the principles of taxation in respect of that tax have not been definitively established as part of the implementation of the enhanced cooperation authorised by" the Commission, the CJEU said.

In a statement, the UK Treasury said that the CJEU had explicitly clarified its ability to challenge the FTT if it was necessary to do so in future.

"Today's decision confirms the UK will be able to challenge the final proposal for a Financial Transaction Tax if it is not in our national interest and undermines the integrity of the single market," a spokesman for the Treasury said. "We risked not being able to do that if we had not made this challenge now."