Financial Transaction Tax Developments

Cyprus/May 2014

The widely discussed issue of financial transaction tax resurfaces as recent developments show that the tax may be implemented by 11 EU Member States starting from 2016. The aforementioned tax was initially introduced as a way to ensure that the financial sector makes a fair and substantial contribution to public finances in order to counter financial crises.

The financial transaction tax received contradicting arguments from numerous Member States in the EU arena from the outset. Following the lack of a unanimous view towards its application, the decision was taken by the Economic and Financial Affairs (ECOFIN) Council of the EU in January 2013 to authorize 11 Member States to move forward with a common financial transaction tax under the enhanced cooperation procedure, whereby subject to certain procedural and legal requirements the Member States would adopt measures that will only apply to them.

Building from the original proposal introduced in 2011 the EU Commission also issued a revised proposal in February 2013 for a Directive to introduce a common financial transaction tax in the 11 interested Member States, namely France, Germany, Estonia, Spain, Portugal, Italy, Greece, Austria, Belgium, Slovenia and Slovakia. As per the proposal of the EU Commission a tax charge would be imposed on all kinds of financial transactions involving one or more financial institutions. More specific a tax charge of 0,1% would be imposed on the exchange of shares and bonds and a charge of 0,01% across derivative contracts.

The opposition of other Member States as to the charge of a financial transaction tax materialized when the UK government filed a legal action in April 2013 requesting for the annulment of the ECOFIN decision authorising enhanced cooperation. The argument put forward by the UK government was that the said tax would have extraterritorial effects and it would impose costs on non-participating Member States. However, the outcome of the legal action did not prove fruitful as the CJEU decision concluded that the core of the arguments set out by the UK government were directed at elements of a potential financial transaction tax and not at the authorization of enhanced cooperation itself. The legal action was subsequently dismissed.

Cyprus was also amongst the Member States that were against the implementation of the tax and it was characterized by the former Ministry of Finance as catastrophic for the economy of Cyprus. However, it was a close call since the adoption of the financial transaction tax was avoided in the negotiations that took place in March 2013 for the agreement on the terms of a Cyprus bail-out.

It is undeniable that the controversy surrounding the financial transaction tax will not cease.  Member States and businesses continue to express their opposition towards the tax contesting that its application could have adverse results on the European economy, especially at a time when the long-awaited recovery is still at a fragile stage. Further legal actions are therefore likely to be filed from the UK government and possibly other opposing Member States at a future point. Nonetheless, during the Council of the EU that took place in May 2014 the 11 participating Member States affirmed their intention to move forward with a progressive implementation of a financial transaction tax that could enter into force by January 2016.

Katerina A. Charalambous
Michalis Zambartas
Tel : +357 22 699 222