Global FS tax newsflash: EU Commission adopts its new proposal for an EU Financial Transaction Tax

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As expected, the European Commission today presented its “new” draft proposal for a Council Directive implementing a financial transaction tax (FTT) in 11 countries. The draft is largely the same as the original proposal released in September 2011 but contains some important changes. The draft Directive continues to have a very broad scope and will impact both EU and non-EU financial institutions. The cost of the tax, coupled with the major operational changes that will be required to comply with the regime, mean that the EU FTT will result in significant cost for financial institutions and their clients. Outside of the 11 countries who have formally joined the Enhanced Cooperation on FTT, we believe that 7 other countries already operate some form of FTT. We believe that FTT, including eventually the 11 states, will be a part of the fiscal landscape in the future. Given this, and the challenges of making the operational changes to comply with a new EU FTT, financial institutions need to be working on a strategy and implementation plan as soon as possible. Financial Services institutions outside of the EU will be liable to pay the FTT in relation to certain transactions.

The new proposal is largely based on the Commission's September 2011 proposal. It is similarly very wide in scope, both in terms of the types of transactions in scope and the financial instruments in scope. The proposal retains the approach of applying the tax to transactions involving a financial institution and placing the liability for the tax on all financial institutions involved in a transaction.

However, as expected, some changes were made to the September 2011 draft. The principal changes are as follows:

  1. The ‘FTT zone’ is now limited to the participating Member States (currently Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain).
  2. For the purposes of determining where an entity is ‘established’ under the regime, the new Directive adds the “issuance principle” to the definition of establishment.

    This means that a financial institution with no nexus with the FTT zone can now be liable to the tax when it is involved in a transaction over instruments issued by a company in the FTT zone.

    As with the prior draft, trading with a counterparty in the FTT zone is also sufficient to bring a financial institution within the scope of the tax. The scope for a non-FTT zone financial institution to be taxed is therefore even wider under the new draft.
  3. The new draft confirms that depositary receipts issued outside of the FTT zone, but with FTT zone securities underlying, are within scope.
  4. New exemptions are included for the issuance of shares and units in UCITS funds and the exchanges of stock in mergers.