UK’s financial transaction tax challenge – mission accomplished

by Allen & Overy LLP

Speed read

The Court of Justice of the European Union (CJEU) has decided that the UK’s legal claim in relation to the financial transaction tax (FTT) was admissible, but premature. However, as explained below, the CJEU’s rejection of the case is by no means a loss for the UK.

 The UK’s challenge

The UK was challenging the legality of the decision taken by the Council of the European Union to authorise the enhanced cooperation procedure (ECP) to establish an FTT for a subgroup of willing Member States. The UK, and a number of other Member States had rejected the possibility of an FTT applying across the whole of the EU.

The UK had two claims.

The first claim was that the Council’s decision authorised an FTT with extraterritorial elements that breached customary international law and a condition for the use of the ECP that competencies, rights and obligations of non-participating Member States be respected. The UK’s concern was that the FTT proposed by the EU Commission contained the ‘counterparty principle’ and the ‘issuance principle’. The counterparty principle is the idea that a financial institution (located in, for instance, the UK) could become subject to the FTT by merely transacting with a person established in a participating Member State. The issuance principle is the concept of the FTT net extending to transactions in respect of instruments issued by FTT zone entities, wherever the party to the transaction is located.

The second claim was that the decision authorised an FTT that will impose costs on non-participating Member States. This is on the basis that the Mutual Assistance Directive generally imposes an obligation on Member States to assist other Member States in the collection of their taxes. The UK claimed that such costs are in breach of another condition for the use of the ECP, which is that expenditure resulting from implementation of a measure under the ECP be borne by participating Member States.

The UK prefaced their claims by acknowledging that they may be premature.

The CJEU’s decision

In a brief judgement, the CJEU has swiftly dismissed the UK’s claim. Although the claim was admissible, the CJEU thought it was premature. The point is that the decision authorising the use of the ECP for the FTT was similarly brief.  Essentially it is made up of two articles. The main article allows cooperation between the participating Member States “in the area of the establishment of a common system of financial transaction tax, by applying the relevant provisions of the Treaties”. It does not go on to prescribe what the FTT measure might be. The other article merely deals with the effective date of any FTT Directive. In the eyes of the CJEU, therefore, the problem was that the UK’s arguments were directed at the elements of a future FTT Directive to be agreed between the 11 Member States, not the Council’s authorising decision.

Why did the UK bring the challenge?

The UK brought this challenge as a precaution. It did so in case it was prohibited from bringing a challenge in relation to any FTT Directive adopted at a later stage. At the time it started proceedings, there was some doubt expressed by commentators (on the basis of CJEU case law) about whether the ability of the UK to bring a challenge at a later stage was crystal clear. The UK, not wanting to take any risks, took the challenge. This was explained in a ministerial statement at the time.

Mission accomplished

Not only has the CJEU said that the UK’s challenge was premature, it also said that any review of the authorising decision should not be confused with a review of any FTT Directive adopted under the ECP in the context of a subsequent action for annulment. In other words, the CJEU has indicated that a subsequent legal challenge is possible. This is the answer the UK Government wanted to establish.  It can be confident now that it is able to bring a claim once any FTT Directive has been adopted – if it thinks that the FTT Directive (whatever its scope is determined to be) is in breach of EU law.

The UK Government can also be happy that the CJEU did not cast any doubt on the merits of its substantive arguments as to why the FTT proposed by the EU Commission would breach EU law. The CJEU was silent on this.  This leaves the UK free to bring the same arguments again if warranted based upon the scope of the eventual FTT Directive.

What are the further challenges?

As outlined above, it is now clear that the UK can bring a claim if merited against any FTT Directive which is eventually adopted. Taxpayers could also challenge the legality of the FTT imposed under any FTT Directive, although they may find it easier to do this by raising the point in a domestic court, in anticipation of a reference being made by that court to the CJEU for clarification.


Short of an outright annulment at this stage (which was not expected) this decision is about the best that the UK could have hoped for. Only time will tell whether the UK’s action will score a win on a political level. For instance, will the 11 Member States take more care in crafting the scope of their agreed FTT Directive in the light of the UK’s demonstrable willingness to take legal action? Also, the fact that the EU Council’s Legal Service and the German Bundestag supported the substance of the UK’s claim should have reinforced the need to take care.

As to what any eventual FTT Directive will look like, we are still waiting. There was a renewed push by France and Germany to reach broad agreement by the European Parliamentary elections this month. Hollande was quoted as saying that he would “prefer an imperfect tax to no tax at all”, so the pressure will be on the other 9 Member States.


DISCLAIMER: 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.

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