United States: A European Financial Transaction Tax

In September 2011, the European Commission initially proposed that a financial transaction tax ("FTT") be implemented by all 27 EU Member States, although it soon became clear that a significant proportion of the Member States would not agree to implement a tax of the nature proposed.

As a result, a smaller number of Member States, who felt strongly that they wished to proceed with such a tax, wrote to the European Commission in the autumn of 2012, officially requesting a little-known process of "enhanced co-operation" in relation to the FTT. This process involves a group of at least nine EU Member States resolving to progress an initiative proposed by the EU Commission, once it has become clear that unanimous agreement would not be reached across the EU as a whole within a reasonable period of time.

In October 2012, the Commission's proposal to allow such enhanced co-operation on the FTT was backed by the European Parliament and European Finance Ministers, and this has culminated in a final proposal, dated 14 February 2013, for a Council Directive ("Proposed Directive"). When implemented, the Proposed Directive will be binding only in the Member States participating in the enhanced co-operation procedure ("Participating Member States")1.

Scope of the FTT - Types of Financial Transactions

Article 2.1(2) of the Proposed Directive prescribes the financial transactions to which the FTT will apply as being any of the following:

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

(b) the transfer between group entities of the right to dispose of a financial instrument as owner and any equivalent operation implying the transfer of the risk associated with the financial instrument, where such transfer or equivalent operation does not constitute a purchase or sale;

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

(d) an exchange of financial instruments; and

(e) a repurchase agreement, reverse repurchase agreement or a securities lending and borrowing agreement.

Exempted from the Proposed Directive are primary market transactions, such as issuing, allotting, underwriting or subscribing for shares or bonds2, and transactions constituting part of a corporate reorganisation or restructuring. Also exempted are transactions with European central banks, and the EU-level institutions and facilities, such as the European Central Bank, the European Investment Bank, the European Financial Stability Facility and the European Stability Mechanism, as well as transactions with other international organisations or bodies that are recognised as such by the public authorities of the host state.

Financial instruments are defined by reference to Section (C) of Annex I to the Markets in Financial Instruments Directive and include transferable securities, money market instruments, units in collective investment funds (both funds covered by the UCITS (Undertakings for Collective Investment in Transferable Securities) Directive and by the AIFMD (Alternative Investment Fund Managers Directive)) and a very broad range of derivative contracts, such as options, futures, swaps and forwards. Financial instruments, in this context, also include structured products, meaning securitisation bonds (i.e. bonds transferring credit risk) or other tradable securities or financial instruments offered by way of transactions equivalent to securitisations, "involving the transfer of risks other than credit risk", for example the transfer of underwriting risk in insurance securitisations.

The Proposed Directive makes clear that each of the transactions listed in paragraphs (a), (b), (c) and (e) of Article 2.1(2) shall be considered to give rise to only a single financial transaction. This clarification is particularly important in respect of repos, reverse repos and stock lending agreements, given the possibility of them being construed, in accordance with their legal structure, as being two separate transactions (and therefore subject to two instalments of FTT), rather than as one transaction, according to their economic substance. However, an exchange of financial instruments will be regarded as two separate transactions for the purposes of the Proposed Directive, which will potentially have significant consequences in the context of liability management exercises where exchange offers are common.

In addition, a material modification of any of the transactions referred to in paragraphs (a) to (e) of Article 2.1(2) will be considered to give rise to a new transaction for the purpose of the FTT. Examples of material modifications include the substitution of a party, the alteration of the object or scope of the transaction (including its timescale) or where the consideration previously agreed upon for the transaction is altered. In addition, any modification that results in a higher level of FTT is considered a material modification, and therefore a new transaction. This approach is primarily designed to prevent tax avoidance.

To Whom Does the Proposed Directive apply?

The Proposed Directive is intended to apply to all financial transactions where:

  • at least one party to the transaction is established in one of the Participating Member States; and
  • a financial institution established in one of the Participating Member States is party to the transaction (whether that financial institution is acting for its own account or for another person, or is acting in the name of a party to the transaction).

Financial institutions, in this context, include any of the following:

(a) an investment firm;

(b) a regulated market or other organised trading venue or platform;

(c) a bank or credit institution;

(d) an insurance or reinsurance undertaking;

(e) a UCITS fund, as well as UCITS management companies;

(f) a pension fund, as well as its investment manager;

(g) an AIF fund, as well as its fund manager;

(h) a special purpose securitisation entity;

(i) a special purpose vehicle for insurance purposes; and

(j) any other undertaking, institution or person which carries out one or more of the following activities, in circumstances where the average annual value of its financial transactions constitutes more than 50% of its overall average net annual turnover3: (i) accepting deposits, lending, financial leasing or issuing guarantees or commitments;

(ii) trading financial instruments for its own account or on behalf of customers;

(iii) acquiring holdings in undertakings;

(iv) participating in or issuing financial instruments; or

(v) providing services related to the activities in (i) to (iv) above.

Central counterparties and central securities depositories are not considered to be financial institutions for this purpose, where they are not themselves engaged in trading activity.


Article 4.1 of the Proposed Directive provides a list of the circumstances in which a financial institution (though not other parties to financial transactions) is deemed to be established in a Participating Member State. These situations include not only circumstances where the financial institution has its registered seat, permanent address or a branch within that Member State, but also where it has either been authorised by the authorities of that Member State to act as a financial institution or is authorised or otherwise entitled to operate, from outside that Member State, in respect of transactions within that Member State. This provision, therefore, is intended to cover situations where the financial institution operates in a jurisdiction by virtue of a passporting regime, such as that under the MiFID Directive.

A financial institution, which is not established in a Participating Member State by virtue of the above criteria, will however be deemed to be established in a Participating Member State if it is facing a financial institution deemed to be established in that Member State by virtue of the above criteria, or where it is facing a non-financial institution which is established in that Member State.

A financial institution will also be deemed to be established in a Participating Member State where it is a party to a financial transaction in relation to a financial instrument issued by a person who has its registered seat, or in the case of a natural person his or her permanent address or usual residence, in a Participating Member State, although derivative transactions which are not traded on an organised platform are excluded from the definition of financial instruments for this purpose. The above reflects what is known as the "issuance principle"; according to this principle, where two parties, who are not otherwise established in a Participating Member State, agree a financial transaction in respect of a relevant financial instrument, issued by an issuer organised in a Participating Member State, then each of those two parties to the financial transaction will become subject to the FTT in that Member State.

Article 4.2 provides that a non-financial institution shall be deemed to be established within a Participating Member State if it has its registered seat or in the case of a natural person his or her permanent address or usual residence in that Member State, or if it has a branch in that Member State, it will be deemed to be established there in respect of financial transactions carried out by that branch. Foreign non-financial institutions will also be considered to be established in a Participating Member State where they engage in a financial transaction in a relevant financial instrument which was issued by an issuer located in that Member State, other than derivatives which are not traded on an organised platform.

There is a carve-out to this general issuance principle, which provides that where the person liable to pay the FTT is able to prove that there is no link between the economic substance of the transaction and any Participating Member State, then there will be no deemed establishment of a person in that Member State in respect of that transaction. It is currently unclear as to what type and level of evidence will be required to prove the lack of an economic link, and there is the potential for different Participating Member States to apply different criteria to this provision when implementing the final directive into their national laws.

Chargeability of the Financial Transaction Tax

The FTT becomes chargeable for each financial transaction at the moment it occurs, and is levied on the taxable amount of the transaction.

In relation to non-derivative financial transactions, the taxable amount is everything which constitutes consideration paid or owed from a counterparty or a third party, in return for the transfer. However, where the consideration is lower than the market price, and in respect of transactions between entities within the same group, the taxable amount shall be deemed to be the market price, determined at the moment the financial transaction occurs. "Market price" in this context is defined as the full amount that would have been paid as consideration in an arm's-length transaction.

In relation to derivative financial transactions, the taxable amount of the transaction is the notional amount of the derivatives contract at the time of the financial transaction.

The applicable rates of FTT are to be fixed by each Participating Member State individually, provided that they must be at least 0.1% of the taxable amount for non-derivative financial transactions and at least 0.01% of the taxable amount in respect of derivative financial transactions.

Liability for Payment of the FTT

The Proposed Directive provides that each financial institution, which is party to the relevant transaction, or is acting in the name of a party to the transaction, or on whose account the transaction has been carried out, is primarily liable for payment of the FTT. The FTT is payable to the tax authorities of the Participating Member State in which the financial institution is deemed to be established in accordance with the above criteria. Failure by the financial institution to pay the FTT within the applicable time limit triggers joint and several liability for payment of the tax for each party to that transaction. The Proposed Directive also permits Participating Member States to make provisions for persons who are not party to the transaction, to be jointly and severally liable for the FTT.

Each Participating Member State is charged with enacting such obligations as to registration, accounting and reporting as are necessary to ensure effective payment of the FTT, and the European Commission is permitted to adopt delegated acts specifying the measures to be taken by Participating Member States in this respect. Where FTT is payable, it must be paid at the moment the tax becomes chargeable, in the case of transactions executed electronically, or within three working days of it becoming chargeable, in the case of all other transactions.

Anti-abuse Provisions

The Proposed Directive provides for a general anti-abuse rule, which directs Participating Member States to characterise, by reference to their economic substance, "artificial arrangements ... put into place for the essential purpose of avoiding taxation and [which lead to] a tax benefit". In this respect arrangements which lack commercial substance will be deemed artificial, and the Proposed Directive provides various examples of situations which can indicate that arrangements are artificial for this purpose, such as where the legal characterisation of individual steps of the arrangement are inconsistent with the legal substance of the arrangement as a whole, or where the transactions concluded are circular in nature.

In addition to the general anti-abuse rule, the Proposed Directive specifically provides that a depository receipt or similar security, which is issued with the essential purpose of avoiding tax on transactions in the underlying security issued in a Participating Member State, shall be considered issued in that Participating Member State if a tax benefit would otherwise arise. In this respect Participating Member States are directed to consider the extent to which trade in the depository receipt has replaced trade in the underlying security, and where such replacement is deemed to have occurred to a significant degree, the burden of proof will fall on the person liable to pay the FTT to demonstrate that the depository receipt was not in fact issued with the essential purpose of avoiding tax on transactions in the underlying security.

Some Observations

There is a very short timescale for implementing the FTT by way of the enhanced co-operation process. A European Parliament committee vote is scheduled for 28 May 2013, and a European Parliament plenary session is scheduled for 2 July 2013. Once enacted and published, Participating Member States are required to adopt the Proposed Directive by 30 September 2013, and the FTT is intended to apply as from 1 January 2014. It remains to be seen how realistic this proposed timetable is, given the volume of other EU legislations currently in the pipeline.

The issuance principle described above gives the proposed FTT an incredibly broad reach so that it includes circumstances where each of the parties to a financial transaction is established outside the FTT zone, and is not acting from a branch within that zone, but where the subject matter of the transaction consists of financial instruments issued by an entity established within the FTT zone. In these circumstances each of the parties to that financial transaction would separately become liable to pay the full amount of FTT to the authorities of the Participating Member State in which the issuing entity is established.

Unlike the FATCA legislation in the U.S., which is collected by means of a withholding mechanism on U.S.-source payments, the Proposed Directive would (if implemented in this form) allow a Member State in the FTT zone to impose the FTT directly on a foreign person. Quite apart from the issue of whether such an approach breaches any principles of EU legislation, it raises questions as to how the FTT would, in such a case, be levied and collected from the parties to the transaction, by the home Member State of the issuer of the underlying financial instrument. It seems unlikely that other EU Member States outside the FTT zone would feel inclined to cooperate in collecting a foreign tax from its own nationals, in circumstances where that EU Member State did not agree to become bound by the terms of the Proposed Directive. It seems even less likely that non-EU jurisdictions would co-operate in this regard.

Another question is how an FTT zone Member State would even become aware of the existence of a financial transaction in the shares of an issuer established in its jurisdiction, particularly if the transaction were effected off-exchange.

Separately, the Proposed Directive is arguably unique amongst post financial crisis legislation, in effectively encouraging the use of derivatives, particularly derivatives transacted over-the-counter, as opposed to on an exchange or other organised platform. This is because, in circumstances where a party wishes to enter into a financial transaction in order to gain exposure, say, to a particular share, and the parties to that financial transaction would thereby become subject to the FTT, then assuming that no leverage is built into the transaction, if that exposure were created not by the sale of the shares themselves, but by entering into a total return swap on those shares, then subject to the final anti-abuse provisions, the FTT payable in respect of that total return swap would be only 10% of the FTT that would be payable on the sale of the shares themselves.

In addition, the exemption of OTC derivatives from the provisions giving rise to the issuance principle means that for two parties to a financial transaction, who have no connection to the FTT zone, payment of the FTT in respect of a transaction linked to an FTT zone-issued share can (subject to the final anti-abuse provisions) be avoided altogether by entering into an OTC derivative on that share, rather than by transacting in the share itself.

However, where a taxable option on a share is sold, then not only will FTT become payable on that sale, but also on the purchase of the underlying shares in order to delta-hedge the option position, or alternatively on the transaction which closes the position. This will make delta-hedging of options on FTT zone equities much more expensive in the future.

It also seems that the extra-territorial scope of the proposed FTT will cause concern for non-FTT zone financial institutions in particular, at least until much greater clarity exists over such matters as what does or does not constitute an economic link to the relevant Participating Member State, and when arrangements surrounding a financial transaction would be considered artificial, for the purpose of the Proposed Directive's anti-abuse provisions. Of particular difficulty is the fact that each of the Participating Member States could in theory have very different laws as to the characterisation of financial arrangements, and the current lack of clarity on such matters from the European Commission makes it extremely difficult for non-FTT zone financial institutions to gauge the extent to which the Proposed Directive will affect their various business lines.


1. Currently, these Member States consist of Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain, although any other Member State is able to join the enhanced co-operation procedure at a later date.

2. In order to preserve fiscal neutrality, the issuance and subscription of shares and units in collective investment funds are not intended to be subject to the FTT. However, secondary market sales and transfers of such instruments, and redemptions of such instruments, are within the scope of the proposed FTT.

3. The average annual value of an entity's financial transactions will be calculated over the three preceding calendar years, with the value of each non-derivative transaction being its taxable amount, and the value of each derivative transaction being 10% of its table amount, each as referred to in "Chargeability of the Financial Transaction Tax" below. In addition, the entity can request that it be considered to be no longer a financial institution, where the average annual value of its financial transactions has not exceeded the 50% threshold in two consecutive calendar years.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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

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

Similar Articles
Relevancy Powered by MondaqAI
Fried Frank Harris Shriver & Jacobson
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Fried Frank Harris Shriver & Jacobson
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions