Global FS tax newsflash: Legal challenge to the EU FTT – what happens now?

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On Thursday last week, the UK launched a legal challenge against the EU Financial Transaction Tax (FTT). The UK has now received support for its challenge from Luxembourg, which publicly supported the UK’s position on Monday. In this Newsflash we set out the background to this challenge, its implications for the EU FTT and what institutions affected by the EU FTT should be doing now.

On Thursday last week, the UK Government lodged an application at the Court of Justice of the European Union (CJE”) to challenge the EU FTT.

Whilst the basis of the challenge has not been made public, we understand that the UK is challenging the use of the Enhanced Cooperation Procedure (ECP) to introduce the EU FTT. Under this procedure, the European Council granted permission for the eleven interested Member States to introduce the EU FTT within those Member States.

Member States had a deadline of 12 weeks, beginning with the publication of the Council’s ECP authorisation decision in the Official Journal of the European Union, to mount a legal challenge with the CJEU. The Council’s decision was published on 25 January 2013, so the UK’s challenge may be seen as a defensive measure to protect the UK’s position as the EU FTT proposal moves forward.

The UK Government was also under pressure from the UK House of Lords to respond to the EU FTT developments. The European Union Committee of the Lords was critical of the UK Government’s position with respect to the EU FTT in a recent letter and called on the Government to engage on the topic as a matter of urgency, including taking “…urgent legal advice on the case for a legal challenge [against the use of the ECP] at the European Court of Justice.”

In mounting this challenge, the UK Government voiced concerns in particular with the extra-territorial scope of the proposed EU FTT. Under the proposal, a financial institution with no presence in any of the eleven Members States could still be brought within the scope of the tax where it enters into a transaction with a counterparty in one of the eleven participating States, or where it enters into a transaction over a financial instrument issued in one of the eleven States.