European Commission Draft Directive on Financial Transaction Tax

Editor’s Note: H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication; the full version, including footnotes, is available here.

The European Commission has published its proposal for a financial transaction tax.

The tax would be paid

  • by financial institutions
  • on transactions in financial instruments
  • if at least one of the parties were located in the EU.

Sales and purchases of shares and bonds would be taxed at 0.1%, derivative contracts at 0.01%. The tax would be introduced from the start of 2014. Part of the revenue would belong to the EU; the rest would be retained by member states.

The Commission, France and Germany are willing to introduce a financial transaction tax at EU level. The UK and Sweden oppose such a tax if it is not global in scope. The German finance minister suggested recently that it could be implemented in the eurozone before the rest of the EU.

Introduction and Background

The proposal

On 28 September the European Commission published a draft directive on a common system of financial transaction tax (“FTT”). This was accompanied by an impact assessment and other documentation. The draft sets out the main features of the FTT as proposed, including minimum tax rates. Some details, such as reporting obligations, payment mechanics and anti-abuse rules would be left for member states to determine when implementing the directive.


The Commission gives several reasons for introducing an FTT:

  • to ensure that the financial sector contributes to the cost of the financial crisis and pays its fair share of tax at a time of budgetary strain;
  • to harmonise taxes on financial transactions in the EU (including those already in place);
  • to discourage risky trading activities (notably, high-frequency trading) and complement regulatory measures aimed at avoiding future crises; and
  • to provide a source of funds for the EU (an “own resource”).

The Commission has not yet published its proposals on how the revenue would be split.


The Commission estimates that the tax could raise of the order of €57 billion a year. At this stage that figure must be highly conjectural, especially if significant financial business migrates to non-EU financial centres as a consequence.


In the wake of the financial crisis there has been much debate around the world on how the financial sector should be taxed. This has already seen a one-off bank payroll tax (“BPT”) in France and the UK and the introduction of bank levies in France, Germany and the UK (among others).

In June 2010 the IMF produced a report for the G20 entitled “A Fair and Substantial Contribution by the Financial Sector”. Discussions continue at G20 level.

The FTT proposal is the most recent step in the Commission’s project on financial sector taxation. In October 2010 the Commission published a communication on the relative merits of an FTT and a “financial activities tax” or “FAT”. (The effect of a FAT would be similar to charging value added tax on financial services: at present most financial services are exempt from VAT.) The Commission suggested that an FTT might be less suitable for unilateral introduction at EU level. It seems now to have moved away from that view.

France and Germany have been keen supporters of an EU FTT. On 9 September their finance ministers submitted a joint outline proposal of their own to the Commission (the “Franco-German Proposal”). German Finance Minister Wolfgang Schäuble has even suggested that the FTT could be implemented in the eurozone before the rest of the EU.

Next steps

The proposal will be discussed by all member states in the EU’s Council of Ministers. The Commission will then present it to the G20 Summit in November.

The Commission proposes that the tax should come into effect from 1 January 2014.



Economic scope. The FTT would be charged:

  • on financial institutions;
  • in respect of financial transactions.

(The Franco-German Proposal did not limit the tax to transactions involving financial institutions.)

Territorial scope. The FTT would apply where:

  • at least one party is established in a member state; and
  • a financial institution established in the territory of a member state is involved in the transaction (a test which is easier to meet than it sounds),


  • the “economic substance” of the transaction is not linked with the member states.

The charge

Liability. Where both parties to a transaction are financial institutions, both would have to pay FTT. Where only one is, it would only be subject to a single charge.

Rates. The draft directive sets out minimum rates:

  • 0.01% for derivatives;
  • 0.1% for other transactions.

Economic Scope

Financial institutions

Basic definition. “Financial institution” is broadly defined and includes:

  • investment firms;
  • regulated markets and other organised trade venues or platforms;
  • credit institutions;
  • insurance and reinsurance undertakings;
  • undertakings for collective investments in transferable securities (“UCITS”) and their managers;
  • pension funds and their managers;
  • alternative investment funds (“AIFs”) and their managers; and
  • securitisation special purpose entities.

Exclusions. Some institutions are excluded from the scope of the draft directive. The exclusion takes two forms. In some cases it applies only to the institution itself: the counterparty may still be taxed. In others, the institution casts its mantle over the transaction as a whole and the counterparty also benefits from the exclusion.

  • Exclusion for the institution itself:
    • the European Financial Stability Facility (the “EFSF”) and any other international financial institution established by two or more EU member states to support members in financing difficulties (an “EU rescue fund”); and
    • certain market intermediaries in their role as such:
      • central counterparties (“CCPs”);
      • central securities depositories (“CSDs”); and
      • international central securities depositories (“ICSDs”).
  • Exclusion for institution and counterparty:
    • certain EU institutions, including the European Central Bank and the European Investment Bank;
    • international organisations or bodies (other than the EFSF or an EU rescue fund) recognised as such in their host states, within the limits set out in the conventions establishing them or their headquarters agreements with their host states; and
    • transactions with the central banks of EU member states.

There is no specific exclusion for central banks outside the EU, or other government agencies. So far as central banks or agencies outside the EU are concerned, this may be because the territoriality exclusion would be expected to apply.

Financial transactions

Basic definition. “Financial transaction” is also broadly defined. It includes:

  • the purchase and sale (including issue and redemption) of:
    • shares;
    • bonds;
    • money market instruments; and
    • units of UCITS and AIFs;
  • repos and stock loans;
  • the conclusion or modification of most forms of derivative agreement (whether or not over financial instruments).

Transactions that do not involve financial instruments or derivatives would not be subject to the FTT. The Commission aims to keep most day-to-day financial activities relevant to individuals and non-financial businesses outside the FTT. These include insurance, mortgage lending, consumer lending, payment services and spot currency transactions. It is not clear whether life assurance would be classified as insurance and kept out of the FTT: life assurance is often a form of investment in shares and other securities. Syndicated lending to corporates also seems likely to fall outside the FTT, on the basis that such loans should not be transferable securities as defined for the purposes of the directive.

The FTT would not be limited to trades on organised markets, but would also cover other types of trade, including over-the-counter trades.

It is not clear whether repos and stock loans would be viewed as a single taxable transaction or as two separate taxable transactions. A fixed-price repo is economically equivalent to a secured loan, which would not be taxed at all. However, repos and stock loans are implicated in short selling, which the Commission wants to curb. Including stock loans within the FTT charge means that transfers of non-cash collateral under derivatives, repos and stock loans would attract an additional FTT charge (or charges).

The definition of “financial transaction” is generally in line with that in the Franco-German Proposal, although that included spot currency transactions.

Primary market exclusion. The issue of shares, other equity securities and bonds would be excluded from the FTT. There is an exception for the issue and redemption of shares or units in UCITS and AIFs, which would be taxed. This could give rise to double taxation of what are often retail savings products: a redemption would either be matched with an issue or require the fund to sell securities. The first case would be economically equivalent to a transfer, but taxed at double the rate. In the second there would be tax on the sale of underlying securities by the fund and on the redemption. Similarly, the issue of securities by the fund would be subject to the FTT, and the subscription proceeds might well be invested through transactions giving rise to a further FTT charge. A fund of funds could be subject to an additional tier of FTT charges.

Groups. Many transaction taxes provide for intra-group transactions to be exempt. Not so the FTT. In fact, the rules for intra-group transactions are more stringent. Intra-group transfers “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” are specifically included, even if they fall outside the basic definition of “financial transaction”.

Territorial Scope

The three elements of the restriction

As noted in the overview, the FTT would be subject to a territorial restriction. This has three elements:

  • at least one party to the transaction must be established in a member state; and
  • a financial institution established in the territory of a member state must be:
    • party to the transaction on its own account;
    • party to the transaction for the account of another person, or
    • acting in the name of a party to the transaction;
  • with an exclusion where the taxpayer “proves that there is no link between the economic substance of the transaction and the territory of any Member State”.

Non-financial institutions

Non-financial-institutions would be “established within a member state”:

  • where they have their registered seat; or
  • if they have a branch there (but only for transactions carried out by that branch).

Financial institutions

The draft directive sets out a hierarchy of rules for determining whether a financial institution is “established in the territory of a Member State”. Financial institutions would pay FTT to their member state of establishment, at the rate set by that member state.

A financial institution would be established in the first of the following:

  • a member state from which it has its authorisation (but only for transactions covered by the authorisation);
  • the member state where it has its registered seat;
  • the member state where it has its permanent address or usual residence;
  • a member state where it has a branch (but only for transactions carried out by the branch);
  • the member state where the counterparty to the financial transaction is established.

Clearly, the final bullet makes the definition of “establishment” much broader than the term itself would suggest.

It appears that a financial institution which is “established in the territory of a Member State” would be treated as “established in a Member State” for the purposes of the requirement that “at least one party to the transaction must be established in a Member State”.


How this would apply is illustrated below.

Example 1. US Bank Sub, the UK subsidiary of US Bank (and authorised in the UK), enters into a transaction with the London Branch of French Bank (authorised in France and passported into the UK).

US Bank Sub is “established” in the UK for the purposes of the transaction. It will pay FTT to the UK at the rate set by the UK. French Bank is “established” in France and will pay FTT to France at the French rate.

Example 2. The transaction is an off-market transaction between the branches of US Bank and French Bank in a third country outside the EU (both authorised in the third country).

For the purposes of this transaction, both US Bank and French Bank are “established” in France and should pay FTT to France at the French rate.

In other words, a financial transaction with a non-EU branch of any EU financial institution would be subject to the FTT, unless it fell within the exclusion.


As noted above, if the taxpayer could prove that there was “no link between the economic substance of the transaction and the territory of any Member State”, the transaction would be excluded from the FTT. The draft does not go into any detail on what this means.

Economic substance linked to EU. This might refer to:

  • the assets or liabilities underlying transactions;
  • where financial institutions carry out the necessary activities for transactions; or
  • perhaps both.

Looking at the asset or liability underlying a transaction, the Commission (or the European Court of Justice) might see a link with a member state in (to take just two examples):

  • the sale of a security issued by an EU corporate, financial institution or sovereign issuer; or
  • a credit default swap over an EU corporate, financial institution or sovereign credit.

Proof. The draft does not make it clear whether a financial institution would need to apply for the exclusion on a case-by-case basis (surely unworkable) or claim it in its FTT return. What is clear is that the burden of proving that a demanding and nebulous condition has been met is firmly on the taxpayer.

Tax Point, Taxable Base and Rates

Tax point

The FTT would be charged on each financial transaction when it occurred, rather than, for example, when individual cashflows arose under that transaction. The fact that a transaction was subsequently cancelled or rectified would be irrelevant except in the case of errors.

Taxable base

The taxable base would depend on whether or not the financial transaction constituted a derivative. In the case of transactions which were not derivative agreements, the taxable amount would be the consideration paid or owed under the transaction. It would not matter whether the consideration came from a party to the transaction or a third party. The taxable amount would, however, be the fair market value where the consideration was lower than the market price or where a transaction took place between group entities. Netting would be ignored when calculating the taxable amount.

By contrast, for derivative agreements the taxable amount for FTT purposes would be the notional amount of the derivative at the time of the financial transaction. Where there was more than one notional amount, the taxable amount would be the highest amount.


Member States would be free to set their own FTT rates as a percentage of the taxable amount. However, the draft directive specifies that these rates shall not be lower than 0.1%, other than in the case of financial transactions relating to derivative agreements, in which case the minimum rate shall be 0.01%. The lower rate for derivative agreements reflects the fact that the taxable base for such transactions would not be the consideration for the transaction but the (higher) notional amount of the derivative.

The difference between taxing a transaction as a derivative on 0.01% of the notional amount or under the default rules on 0.1% of the consideration would vary from transaction to transaction. Options would be taxed as derivatives. Whether this would be an advantage would depend on the ratio of the option premium to the notional value of the contract.

Compliance Obligations

Liability for FTT would fall on each financial institution which was either a party to the transaction (whether for its own account or otherwise) or on whose account the transaction had been carried out. Where a financial institution only acted for the account of another financial institution, that other institution would be liable for the FTT. The draft directive imposes joint and several liability on each party to a transaction for the FTT due by a financial institution, if the latter fails to pay the tax. This joint and several liability can extend to persons other than financial institutions. The draft directive further empowers Member States to extend the scope of this joint and several liability to other parties.

It would be for member states to prescribe the registration, tax accounting and other compliance obligations required to account for and collect FTT. Financial institutions would have to make a return on the 10th day of each month in respect of FTT chargeable in the previous month.

Any FTT due would have to be paid either (i) when the tax became chargeable, in the case of an electronic transaction; or (ii) within three working days from when the tax becomes chargeable, in all other cases.


The draft directive requires member states to adopt measures to prevent tax evasion and avoidance. The European Commission may make delegated legislation specifying the measures to be taken in this respect by member states. One particular abuse referred to is the manipulation of the notional amount of a derivative agreement. It is made clear that all existing EU and OECD administrative co-operation arrangements (for example, the existing EU Mutual Assistance and Mutual Enforcement of Revenue Claims Directives) should be used in order to give effect to the FTT.

Interaction With Other Taxes

Apart from VAT, it is intended that there should not be any tax on financial transactions other than the FTT once it comes into force. Of course, most financial transactions do not give rise to VAT, although the Principal VAT Directive provides for the possibility of an “option to tax” in respect of such transactions. The restriction on taxes on financial transactions other than the FTT would have an impact on UK stamp duty and SDRT, which are typically imposed at 0.5% on sale transactions in respect of UK shares and some transactions in respect of debt securities. Stamp duty and SDRT raise around £3 billion each year for the UK.

The draft directive would also amend the Capital Duty Directive. This Directive governs the incidence of indirect taxes on the raising of capital by EU companies (although a number of EU Member States – including France and the UK – no longer impose capital duty on such transactions). The directive creating the FTT would have priority over the Capital Duty Directive, although the effect of this should be limited, because the FTT should not apply to the issue of new shares and bonds by companies.


The FTT would clearly have a range of implications.

Short-term transactions. The rate of tax takes no account of the duration of the transaction. It would therefore have its strongest impact on short-term transactions. These include high-frequency trading transactions, which the Commission would happily see reduced. But they may also include marketmaking, the short-term derivatives used by banks to manage risk and the short-term repos they use to manage liquidity. The tax would apply each time a transaction is rolled over.

Complex transactions. The more separate transactions, the more charges. As noted above, there could be double or triple charges on a redemption of units in a UCITS. A floating-to-fixed interest-rate swap hedging a floating-rate loan would be chargeable, where a simple fixed-rate loan would not. Hedging an equity derivative for a customer by buying the relevant equities would incur an additional charge. Synthesising one derivative by combining others would give rise to multiple charges. Underwriters of share issues would need to consider how the subscription arrangements should be structured. And so on.

Subsidiarisation. There would be a strong incentive for financial institutions headquartered in the EU to incorporate branches outside the EU, to the extent they have not already done so. Of course, other factors such as local regulatory capital requirements would also be relevant.

Economic impact of the tax. Banks would no doubt seek to pass on the economic burden of FTT in their standard-form documentation for underwriting, repos and stock loans. This would incentivise non- EU counterparties to deal with non-EU financial institutions.

Rates. Although member states would in theory be free to set rates of FTT above the minimum, it is difficult to see any of the significant players exercising that freedom in practice. A member state doing so would put its own financial sector at a competitive disadvantage.

Global FTT. The draft directive is intended to “pave the way towards a coordinated approach with the most relevant international partners”. However, the territoriality provisions in the directive as drafted have not been framed with global rollout in mind. The draft does not offer any credit mechanism for any non- EU FTT or allow for a tax treaty override to prevent double taxation. (The Franco-German Proposal would have halved the charge where the counterparty was in a non-EU jurisdiction which applied an FTT, if that jurisdiction entered into a double tax treaty.)

Reaction So Far

The proposed FTT is already proving controversial.

The Commission and some member states, most notably France and Germany, perceive it as part of the overall EU programme of regulating the financial services sector and paying for the ongoing bail-out of that sector and certain sovereign states within the EU. The FTT is particularly targeted at high-volume trading activity. Furthermore, the Commission intends the FTT to be a direct source of revenue for the EU itself, which would make the EU less dependent on contributions from the member states.

By contrast, the UK has stated that it will exercise its right of veto in respect of the FTT proposal. The FTT would disproportionately and adversely affect London as a financial centre – especially if not adopted worldwide – while directing much of the revenue from transactions carried out in London elsewhere. Whether the UK sticks to that position remains to be seen. Sweden, which tried an FTT in the 1980s, is also against.

In short, significant issues remain to be dealt with before the FTT can take effect.

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