Compliance with the rules and conditions of Arts. 326–34 TFEU

Art. 326 TFEU provides that “[a]ny enhanced cooperation shall comply with the Treaties and Union law. Such cooperation shall not undermine the single market or economic, social and territorial cohesion. It shall not constitute a barrier to or discrimination in trade between Member States, nor shall it distort competition between them.”

The Council Legal Service concludes “that the criterion for deemed establishment of an institution which Article 4(1) point (f) of the proposed Directive…is discriminatory and likely to lead to distortion of competition to the detriment of Non-participating Member States”.

Double taxation and distortion of competition

It is undisputedly acknowledged that the European Commission’s proposal, in Art. 4(1) point (f), exposes financial institutions established in non-participating Member States that are parties to financial transactions taxable under the regime of the proposal to risks of effective double taxation.

Double taxation of international (cross-border) activities may not be considered illegal per se, as the CJEU’s jurisprudence continually reminds us.³² It is conversely a frequent phenomenon that cannot find a legal prohibitive basis either in international customary law or in EU primary law, precisely resulting from (Member) States’ competences on tax matters.

In this respect, non-prohibition of international double taxation is a rule, but for the EU the following points merit attention:

 It calls for looking for mechanisms aimed at broad fiscal harmonisation. In the case of the FTT under enhanced cooperation, there are hardly sustainable arguments why it should be treated differently from any other situation of double taxation of international activities, i.e. in the framework of preventive bilateral conventions.

 It limits the significance of arguments on the potential distortion of competition that may arise, because they would highlight the need to reconsider from a legal/regulatory perspective all cases of double taxation of international activities.

32 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62013CJ0209&from=EN

Compatibility with the principles of free movement of capital

Restrictions to free movement of capital are prohibited by TFEU Art. 63.1, which states that “all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited”.

The Council Legal Service considers that

[t]he proposed ‘counterparty principle’ would render less attractive financial transactions with financial institutions located outside the participating Member States, since these institutions would have to pay the FTT at different rates in different countries and the counterparty may be unwilling to be liable for that tax and to face, on these grounds, legal uncertainty and possible disputes with the authorities of the participating Member State.

The Commission’s Legal Service refutes this conclusion by referring to CJEU case law on double taxation (see above).

Discriminatory treatment of financial institutions

This is an issue that needs analysing in more detail, but requires a wider study.

6.2.2.2 Assessment in relation to Art. 327 TFEU

Art. 327 TFEU provides that “[a]ny enhanced cooperation shall respect the competences, rights and obligations of those Member States which do not participate in it. Those Member States shall not impede its implementation by the participating Member States.”

Art. 327 sets out duties on non-participating Member States to ensure that they do not take actions that impede implementation by participating Member States. Conversely, non-participating Member States shall see their competences, rights and obligations respected.

The FTT raises several issues connected with non-participating Member States’ competences, rights and obligations, which are still pending. Moreover, recent declarations by UK Chancellor of the Exchequer George Osborne point to the possible undesirable outcome of the legal uncertainties.³³

The compatibility of the European Commission’s proposal with the principles and criteria of Art.

327 has to be analysed particularly in light of its Arts. 4(1)(f)³⁴ (the “counterparty principle”) and 4(3)³⁵ (the “escape clause”), setting the principles of financial institutions’ “deemed

33 See “EU financial transaction tax on life support”, EUobserver, op. cit.

(https://euobserver.com/economic/131435): “I make it very clear that if the proposal impacts on the UK, other non-participating states and on the single markets, we will have to go to court.”

34 “1. For the purposes of this Directive, a financial institution shall be deemed to be established in the territory of a participating Member State where any of the following conditions is fulfilled:

(f) it is party, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction, to a financial transaction with another financial institution established in that Member State pursuant to points (a) (b) (c) (d) or (e), or with a party established in the territory of that Member State and which is not a financial institution”.

35 “3. Notwithstanding paragraphs 1 and 2, a financial institution or a person which is not a financial institution shall not be deemed to be established within the meaning of those paragraphs, where the

establishment”, “deemed established counterparty” and derogations to eliminate situations with insufficient nexus. The opinions of the Council³⁶ and the Commission’s³⁷ Legal Services significantly diverge on the possible legal issues at stake and it is to be noted that the European Parliament’s proposed amendments to the European Commission’s proposal³⁸ address none of these provisions.

The Council’s Legal Service concludes “that the criterion for deemed establishment of an institution which Article 4(1) point (f) of the proposed Directive contains:

1) exceeds Member States’ jurisdiction for taxation under the norms of international customary law as they are understood by the Union;

2) is not compatible with Article 327 TFEU as it infringes upon the taxing competences of non-participating Member States;”.

Respect of customary international law/extraterritorial exercise of jurisdiction

The question of the compatibility with customary international law and notably of the possible illegal extraterritorial exercise of jurisdiction by participating Member States was addressed in the judgment of the CJEU of 30 April 2014,³⁹ after the UK’s challenges concerning the European Council’s Decision 2013/52/EU to authorise the enhanced cooperation procedure for the FTT.

The Court’s judgment unambiguously argues in favour of the conceivability of variable geometry, as it considers that the enhanced cooperation procedure authorised in the Council Decision of 22 January 2013 is a legitimate mechanism to implement an FTT in participating Member States.

The judgment, however, does not definitively prevent further legal challenges, as the Court made clear it could not review the legality of the FTT proposal to be adopted.

Infringement of the taxing competences of non-participating Member States (sovereignty) and the burden imposed on their markets

Although there is need for further detailed analysis, these issues are addressed respectively in the present and following subsections.

6.2.2.3 Assessment in relation to Art. 332 TFEU

person liable for payment of FTT proves that there is no link between the economic substance of the transaction and the territory of any participating Member State.”

36 See Council, Opinion of the Legal Services, Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax (FTT), 13412/13 (2013), op. cit.

37 See “Implementing enhanced cooperation in the area of Financial Transaction Tax – Response to the opinion of the Legal Service of the Council on the legality of the counterparty-based deemed establishment of financial institutions”, Non-Paper by the Commission Services (n.d.), op. cit.

38 See the European Parliament legislative resolution of 3 July 2013 on the proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax (COM(2013)0071 – C7-0049/2013 – 2013/0045(CNS)) (Special legislative procedure – consultation).

39 See the judgment of the Court (Second Chamber) of 30 April 2014 in Case C-209/13, United Kingdom v.

Council, op. cit.

Art. 332 TFEU provides that “[e]xpenditure resulting from implementation of enhanced cooperation, other than administrative costs entailed for the institutions, shall be borne by the participating Member States, unless all members of the Council, acting unanimously after consulting the European Parliament, decide otherwise”.

The original European Commission proposal imposed on financial institutions established in non-participating Member States or third countries, and party to a financial transaction subject to the tax, the obligation to collect the tax and proceed with its payment to the participating Member States where the other party is located. This raised several issues (sovereignty, extraterritoriality, costs, etc.).

The proposal was amended and presently ensures that the tax collection and payment complies with the Treaty.

6.2.3 Impact on the budgetary principles of universality and unity