IMPLEMENTING ENHANCED COOPERATION IN THE AREA OF FINANCIAL TRANSACTION TAX

IMPLEMENTING ENHANCED COOPERATION IN THE AREA OF FINANCIAL TRANSACTION TAX RESPONSE TO THE OPINION OF THE LEGAL SERVICE OF THE COUNCIL 1 ON THE LEGALITY OF THE COUNTERPARTY-BASED DEEMED ESTABLISHMENT OF FINANCIAL INSTITUTIONS (ARTICLE 4(1) POINT F) OF THE FTT PROPOSAL COM(2013) 71 FINAL) NON-PAPER BY THE COMMISSION SERVICES 2 On 6 September 2013 the Legal Service of the Council delivered an Opinion on the legality of the counterparty-based deemed establishment of financial institutions (Article 4(1) point f) of the Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax). In response to that Opinion, the present room document repeats and further explains the Commission s Services position on the matter. In order to allow the Council Working Party to assess the legality of the principle at issue from a broader perspective, the Commission s Services have re-analysed the proposed rule in the light of the Opinion of the Council Legal Service. 1 Council doc 13412/13 limité [JUR448 / FISC 163 / ECOFIN 771] 2 Commission document protected pursuant to Article 4 of Regulation (EC) No 1049/2001 of the European Parliament and of the Council (OJ L 145, 31.5.2001, p. 43). 1

I. Introduction: Scope and structure of the Opinion of the Council LS 1. The Council LS states that its Opinion was requested by the Council Working Party on Tax Questions Indirect Taxation. In that Working Party, doubts had been expressed regarding the compatibility of Article 4(1)(f) of the Directive proposed by the Commission 1 with Article 327 of the Treaty on the Functioning of the European Union (TFEU), equal treatment, proportionality and the principles governing the internal market, in particular the free movement of capital. Moreover, it had been contended that Article 4(1)(f) of the proposal would disrespect fiscal competences of non-participating Member States due to the fact that the link between the taxing Member State and the non-resident person liable to pay FTT was insufficient to justify the exercise of prescriptive fiscal jurisdiction over that non-resident person (point 2). 2 2. In its Opinion, the Council LS points out that the above request for a legal analysis must lead to an examination of the proposed provision under the general rules and principles of the TFEU and the Treaty on European Union (TEU), including the obligation under Article 3(5) TEU to respect customary international law, and under the specific rules concerning enhanced cooperation, in particular Article 327 TFEU (point 4). As a result of its analysis, the Council LS concludes that Article 4(1)(f) of the proposed Directive (1) "exceeds Member States' jurisdiction for taxation under the norms of customary international 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", and (3) "is discriminatory and likely to lead to distortion of competition to the detriment of non participating Member States" (point 42). II. Contents and context of Article 4(l)(f) of the proposed FTT Directive 3. The FTT is a tax on financial transactions as defined in Article 2(2) of the proposed Directive (e.g., the purchase and sale of a financial instrument in the sense on the Directive 3 ). Chapter II of the proposal defines the "Scope of the common system of FTT". Pursuant to Article 3(1), the proposed Directive "shall apply to all financial transactions, on the condition that at least one party to the transaction is established in the territory of a participating Member State and that a financial institution established in the territory of a participating Member State is party to the transaction". 4. Article 4 contains rules on what is described as the "establishment" of the parties to financial transactions. With respect to financial institutions, 4 and as far as relevant in the present context, Article 4(1) provides that, for the purposes of the 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: (a) it has been authorized by the authorities of that Member State to act as such, in respect of transactions covered by that authorization; 1 COM(2013) 71 final of 14 February 2013. 2 The "points" mentioned in brackets refer to the Opinion of the Council LS. 3 Directive 2004/39/EC of 21 April 2004 markets in financial instruments, OJ 2004 L 145/1. 4 The term "financial institution" is defined in Article 2(8) of the proposed Directive, which refers to the definitions used in different existing Directives concerning the financial sector. 2

(b) it is authorized or otherwise entitled to operate, from abroad, as financial institution in regard to the territory of that Member State, in respect of transactions covered by such authorization or entitlement; (c) it has its registered seat within that Member State; (d) its permanent address or, if no permanent address can be ascertained, its usual residence is located in that Member State; (e) it has a branch within that Member State, in respect of transactions carried out by that branch; (f) it is party (...) 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; (g) ( )" III. Analysis of the alleged illegality of Article 4(l)(f) of the proposed FTT Directive 5. It is correct that the provisions of the Directive proposal must comply (1) with rules of customary international law, (2) with general rules of the TEU and the TFEU, and (3) with the special rule in Article 327 TFEU concerning enhanced cooperation. However, the Commission's services consider that the reasoning of the Council LS and the conclusions that it draws from those propositions are incorrect. 1. Compatibility of Article 4(l)(f) with customary international law 6. It is well-established case-law of the Court of Justice of the European Union (CJEU) that the institutions of the EU, when adopting an act, are bound to observe international law in its entirety, including rules of customary international law. 5 This obligation has also found its expression in Article 3(5) TEU. 6 The view taken by the Council LS, however, that Article 4(1)(f) of the proposed FTT Directive violates customary international law is unfounded. 7. As the Council LS rightly states, "(u)nder customary international law, (...), jurisdiction is based on the existence of a relevant link between the State that exercises jurisdiction and the person or situation over which jurisdiction is exercised" (point 19). It is indeed generally accepted that the two main principles on which a State can base its jurisdiction here to be understood as the jurisdiction to prescribe legislation 7 are the nationality (or personality) principle, accepting a State's jurisdiction over its nationals, and the territoriality principle, which confers jurisdiction not only over persons living within the territory of a State, but also 5 For example Judgment of 24 November 1992, C-286/90, Poulsen and Diva Navigation Corp. [1992] ECR I-6019, paras 9 et seq.; Judgment of 16 June 1998, C-162/96, Racke GmbH & Co. [1998] ECR I-3655, paras 45 et seq. 6 See CJEU, Judgment of 21 December 2011, C-366/10, Air Transport Association of America, not yet reported in ECR, para. 101. 7 For the distinction between the different categories of jurisdiction (to prescribe, to adjudicate and to enforce) see, e.g., American Law Institute, Restatement of the Law (3rd) - The Foreign Relations Law of the United States (1987), 401. 3

over events that affect that territory. The latter aspect of a State's jurisdiction even includes events that have taken place abroad but have effects within its borders. 8 8. However, the Council LS misinterprets the relevance of these customary international law requirements for the determination of tax jurisdiction in so far as it bases its reasoning almost entirely on the question "whether other States have... a more relevant interest in regulating the taxpayer's conduct" (point 19; emphasis added). It is on the basis of this misconception that the Council LS then concludes that Article 4(1)(f) would impinge without adequate justification on "more relevant tax jurisdiction of other States" (points 20 et seq.), and adds that the provision does not "stand the test of territorial connection" that the EU itself would defend in relation to action by third countries (point 19). a) Irrelevance of other States' interests 9. It is striking that the Council LS does not cite any international law authority whatsoever for the far-reaching allegation that the EU legislator would be in breach of customary international law if the Commission proposal is followed. In the Council LS's view, under customary international law, the answer to the core issue, namely whether there is "sufficient nexus to justify the exercise of taxing jurisdiction by participating Member States in respect of the financial transactions covered by Article 4(1) point f)", would simply depend on "whether other States have not a more relevant interest in regulating the taxpayer's conduct" (point 19). In making that statement, the Council LS moves too quickly from the existence of a "nexus" to the interests of other States, and already from a perspective of pure logic the latter criterion is difficult to understand. It may be an echo of the long discussion in public international law whether a State's jurisdiction to prescribe tax legislation is subject to any limitations (and if so, how these limitations can be defined), but it offers no legal guidance in that respect. The generally accepted view today is that tax jurisdiction is limited by territoriality, and there is broad consensus over the limits of that jurisdiction (for details see infra paras 14 et seq.). 10. It is true that the interests of other States are generally taken into account today when determining the limits of a State's jurisdiction, even beyond the area of taxation. In this respect it has indeed been suggested in academic writing that a State should be obliged to renounce its jurisdiction if another nation with concurrent jurisdiction has a stronger interest in applying its own legislation. 9 Such a balance of interest approach has in fact been advocated in particular by some US scholars. 10 11. However, it is significant that the well-respected American Law Institute, in its Restatement (Third) of Foreign Relations Law of the United States, has refused to endorse 8 See, e.g., American Law Institute, Restatement of the Law (3rd) - The Foreign Relations Law of the United States (1987), 402, and for a broader overview Maier, "Jurisdictional Rules in Customary International Law", in: Meessen (ed.), Extraterritorial Jurisdiction in Theory and Practice (1996), 64, at 66 et seq., referring to Permanent Court of International Justice, Judgment of 7 September 1927, The Case of the S.S. "Lotus", PCIJ Series A. - No. 10, p. 18 et seq. Compare further on the two main principles also Martha, The Jurisdiction to Tax in International Law (1989), at 48 et seq.; Advocate General Kokott, Opinion of 6 October 2010, C-366/10, Air Transport Association of America, not yet reported in ECR, para. 149. 9 See Maier, "Jurisdictional Rules in Customary International Law", in: Meessen (ed.), Extraterritorial Jurisdiction in Theory and Practice (1996), 64, at 72 et seq. It should be observed that any such balancing is necessarily based on the premiss that both States do in principle have jurisdiction to tax. 10 See Bianchi, "Comment on: Jurisdictional Rules in Customary International Law", in: Meessen (ed.), Extraterritorial Jurisdiction in Theory and Practice (1996), 75, at 83 et seq. 4

such a requirement as a rule of international law: in 403 it merely states as a rule that "a state may not exercise jurisdiction to prescribe law with respect to a person or activity having connections with another state when the exercise of such jurisdiction is unreasonable", while any reference to other States' interests only reflects the general principle of comity, i.e. of mutual courtesy and respect between nations. 11 Along the same lines Advocate General Darmon pointed out in the well-known Wood Pulp case that even US authors admit that there is "no evidence that interest balancing constitutes a rule of international law", and he explicitly warned the CJEU not to take over this approach into the area of EU law. 12 In fact, reconciliation of conflicting interests, if any, is rather considered as something that can be pursued by diplomatic negotiations. 13 12. Hence, it must be concluded that a State's jurisdiction over a certain matter is not a priori reduced - or even precluded - simply because another State likewise has jurisdiction over the same matter, even where it could be said that the latter State has a "better" interest to regulate that matter. Quite the contrary, the existence of concurrent claims of jurisdiction by different States is not excluded in general international law, 14 and situations of multiple jurisdictional competence even occur quite frequently. 15 In particular, no conflict rules exist to regulate a preference in the specific case of concurrent fiscal jurisdiction 16 - the standard way how the international community addresses concurrent tax jurisdiction is by way of double tax conventions. 13. Therefore, the question raised by the Council LS regarding a "more relevant interest" of other States to tax the financial transactions covered by does not reflect a valid standard under customary international law which Article 4(1)(f) of the proposed FTT Directive would have to comply with. In other words, the question is irrelevant in the present context, irrespective of whether these other States be non-participating Member States or third countries. b) Relevance of a sufficient "nexus" to the taxing State 14. Yet, nothing in the foregoing discussion should be taken as implying that a State's tax jurisdiction is not subject to any limitation at all; the point is simply that no such limitation is to be derived from a criterion involving the interests of other States. Instead, the sole relevant criterion for the determination of tax jurisdiction is the connection between a State and the person or transaction it wishes to subject to taxation. This is the very criterion the Council LS itself identifies as being of primary relevance in customary international law (see supra para. 11 Maier, "Jurisdictional Rules in Customary International Law", in: Meessen (ed.), Extraterritorial Jurisdiction in Theory and Practice (1996), 64, at 72 et seq.; Jeffery, The Impact of State Sovereignty on Global Trade and International Taxation (1999), 52 et seq. Referring to comity also United Nations International Law Commission, Report of the 58th session (2006), Annex E "Extraterritorial jurisdiction", para. 30. 12 Opinion of 25 May 1988, Joined Cases C-89/85 et al., Ahlström Osakeyhtiö [1988] ECR 5193, at paras 41 et seq. 13 Shaw, International Law, 6th ed. (2008), at 690. 14 See Bianchi, "Comment on: Jurisdictional Rules in Customary International Law", in: Meessen (ed.), Extraterritorial Jurisdiction in Theory and Practice (1996), 75, at 91. 15 See Brownlie's Principles of International Law, 8th ed. (2012), at 457. 16 Martha, "Extraterritorial Taxation in International Law", in: Meessen (ed.), Extraterritorial Jurisdiction in Theory and Practice (1996), 19, at 21. 5

7), and the decisive question is how this criterion is to be applied in the specific area of taxation. 15. In this respect there is, as a fundamental starting point, general consensus that a certain connection ("nexus") is required between a State and the person, property or transaction it wants to tax. 17 As the following passage from a ruling of the German Constitutional Court, highlighted by the leading scholar F.A. Mann, demonstrates, it is exactly this "nexus" which has the function of preventing that one State may act unreasonably in relation to another (see supra para. 11): "The imposition of taxes upon a foreigner living abroad, which is founded upon a set of facts wholly or partly implemented abroad, requires appropriate points of contact for taxation by the taxing State to prevent interference, contrary to public international law, with the foreign State's claim to sovereignty. These points of contact and their factual closeness must, from the point of public international law, satisfy a minimum reasonableness. This requirement constitutes an essential legal limitation of the sets of facts which according to the rules of its own legal system a State may lawfully lay hold of i.e., a restriction of its international legislative jurisdiction. The legal possibility of imposing taxes upon foreigners is subject to clear limits by the necessity of contact, for instance, with nationality, establishment, residence or sojourn, the realization of a set of taxable facts or the achievement of a legally relevant result within the State." 18 16. This passage summarises the broad legal parameters regarding the necessary relation between a fiscal subject or object of taxation and a State as the potential holder of tax jurisdiction over that subject or object. That relation (or "fiscal attachment") may be of a direct nature towards the fiscal subject ("personal attachment" reflecting the State's personal sovereignty over its nationals and over persons with a certain presence within its territory), or it may be indirect through a connection of the object of the tax with that territory ("economic attachment"). 19 17. There must, therefore, be either a personal or an objective "nexus" between the taxpayer and the State concerned. Personal connecting factors include the domicile, residence or citizenship of individuals and the place of incorporation or of effective management of legal entities, while for an objective connecting factor to exist it is sufficient that parts of a transaction or activity involve the taxing State, or that the object of the action is somehow connected to the taxing State. 20 17 See, e.g., Mann, "The Doctrine of Jurisdiction in International Law", 111 Hague Academy - Receuil des Cours (1964), 1, at 109 et seq., citing in particular the US Supreme Court, Judgment of 5 April 1954, Miller Bros. v. Maryland, 347 U.S. 340 (1954), at 342. 18 Mann, "The Doctrine of International Jurisdiction Revisited after Twenty Years", 186 Hague Academy - Receuil des Cours (1984), 9, at 29 et seq., citing the Bundesverfassungsgericht, Order of 22 March 1983, 2 BvR 475/78, Entscheidungen des Bundesverfassungsgerichts (BVerfGE) 63, 343, at 349. 19 Martha, "Extraterritorial Taxation in International Law", in: Meessen (ed.), Extraterritorial Jurisdiction in Theory and Practice (1996), 19, at 23 et seq. 20 Lang, Introduction to the Law of Double Tax Conventions, 2nd (2013), m.no. 1. 6

18. The fact that there is general international consensus on these connecting factors is also confirmed by the American Law Institute's Restatement (Third) of Foreign Relations Law of the United States, which sums up the "basic rules" on tax jurisdiction in 411 and explains their practical application in 412. What is particularly remarkable is that the Restatement explicitly addresses transaction taxes. In this respect 411(3)(b) emphasises as one of these basic rules that a State "may exercise jurisdiction to tax a transaction that occurs, originates, or terminates in the state's territory or has some other substantial connection to the state". 412(4) then demonstrates how this basic rule is to be applied by stating that "(a) state may exercise jurisdiction to tax a transaction that occurs, originates, or terminates in its territory or that has a substantial relation to the state, without regard to the nationality, domicile, residence, or presence of the parties to such a transaction". 19. It is against this yardstick that Article 4(1)(f) of the proposed FTT Directive must be measured. The Commission's services consider that this provision complies with the aforementioned requirements of international tax law and of customary international law in general. c) Analysis of the proposed Article 4(l)(f) 20. In this respect it must, first of all, be pointed out that the harmonised FTT as proposed by the Commission is devised as an indirect tax in the sense of Article 113 TFEU. From Article 3(1) and Article 5(1) of the proposal it follows that FTT is levied on each "financial transaction" falling into the scope of the Directive. Thus, FTT is an objective tax on a particular event a "financial transaction" and not on a certain person. In this sense, FTT can be considered as a form of an excise on the transactions concerned. 21 21. This focus on the taxable object requires a clear answer in the proposed Directive to the question "what is subject to FTT". The general definition of taxable "financial transactions" is provided by Article 2(2) of the proposal, which inter alia mentions (a) "the purchase and sale of a financial instrument before netting and settlement", (c) "the conclusion of derivatives contracts before netting or settlement", and (d) "an exchange of financial instruments". The financial transactions covered by the proposal are essentially bilateral contractual agreements involving financial instruments in the sense of Directive 2004/39/EC and certain other securities, and leading to a reciprocal exchange of values between the parties. 22. Such transactions are covered by the Directive, and are taxable in one of the participating Member States, only if a territorial requirement is met. In this respect Article 3(1) of the proposal requires "that at least one party to the transaction is established in the territory of a participating Member State and that a financial institution established in the territory of a participating Member State is party to the transaction". 23. Article 4(1) regulates the conditions under which "a financial institution shall be deemed to be established in the territory of a participating Member State". Once the requirements of Article 3(1) are met, the financial transaction becomes taxable in a participating Member State. The tax accrues to the participating Member State in the territory of which the financial institution is deemed to be established (see Article 10(1), 2nd subparagraph of the proposal), it being understood that only one participating Member State is designated at either side of 21 See, e.g., Shome, Financial Transaction Taxes (Indian Council for Research on International Relations - Working Paper 254, April 2011), p. 7. 7

the transaction (cf. Article 4(4)). 22 Thus, Article 4(1) not only helps to determine whether a given financial transaction is subject to FTT at all under the Directive, but it also and this is its key function serves to identify the participating Member State that will have the right to tax the transaction. 24. The rules contained in Article 4(1)(a) to (e) providing for the so-called "residence principle" are rather straightforward and not called into question by the Council LS. They concern situations where a financial institution has either been authorized by a participating Member State to exercise financial transactions within its territory, or has its registered seat, permanent address or usual residence within that territory, or has a branch there through which it carries out financial transactions. The careful phrasing of each individual provision guarantees that the financial transactions made by the financial institutions covered have a "nexus" with the territory of the participating Member State concerned which is sufficiently close to accept that this State indeed has tax jurisdiction over that financial transaction. 25. In fact, in all the situations addressed by Article 4(l)(a) to (e) the financial transactions concerned are closely linked to that participating Member State because, in the words of 411(3)(b) and 412(4) of the American Law Institute's Restatement (supra para. 18), the respective "transaction... occurs, originates, or terminates in the state's territory or has some other substantial connection to the state". Through the establishment requirements as formulated in the individual rules, Article 4(1)(a) to (e) make sure that in each case where the "residence principle" applies there is not only a connection of the financial institutions with the territory of the participating Member State, but also a "nexus" of the relevant financial transaction as such with that State. This holds irrespective of where the other party to that transaction is established. 26. Article 4(1)(f) of the proposed Directive, on the other hand, addresses the situation of a financial institution that is not (deemed to be) established in the territory of a participating Member State under Article 4(1)(a) to (e). This financial institution will, therefore, be established either in a non-participating Member State or in a third country. In order for such a financial institution to be liable for FTT, it must participate in a financial transaction with a specifically qualified counterparty: that counterparty must either be "a financial institution established in that Member State" pursuant to Article 4(l)(a) to (e), or "a party... which is not a financial institution" but is nevertheless "established in the territory of that Member State" pursuant to the criteria in Article 4(2). 27. Thus, Article 4(l)(f) the so-called "counterparty principle" only applies if the financial institution's counterparty is (deemed to be) established in a participating Member State. The rule does not create tax jurisdiction where it would not otherwise exist. It simply determines who is liable for tax on a transaction which in any event falls within the tax jurisdiction of the participating Member State. 28. Where the counterparty is another financial institution, it has just been demonstrated that the provisions in Article 4(1)(a) to (e) ensure that the financial transactions made by this financial institution have a sufficiently close "nexus" with the territory of a certain participating Member State to grant that State tax jurisdiction (see supra paras 24-25). The same is true where the counterparty is a person that is not a financial institution, since the 22 Moreover, on each side of the transaction, double liability of financial institutions is avoided through Article 10(2). 8

criteria in Article 4(2) likewise ensure a sufficiently close "nexus" between the relevant financial transactions and the territory of a participating Member State. 29. Since, therefore, the applicability of Article 4(l)(f) is based on the fulfillment by the counterparty of one of the establishment criteria under either Article 4(1)(a) to (e) or Article 4(2) and, where one of these criteria is met, the participating Member State already has tax jurisdiction over the financial transaction concerned, at least two fundamental conclusions can be drawn. 30. First and foremost, the fact that Article 4(l)(f) creates tax liability for a financial institution which does not itself fulfill the requirements in Article 4(1)(a) to (e) for establishment in a participating Member State does not call into question the tax jurisdiction of that State over the financial transactions in question. This is because the necessary "nexus" between the relevant financial transaction and the territory of the participating Member State is already ensured through the criteria contained in Article 4(1)(a) to (e) and Article 4(2). 31. In all the situations of cross-border financial transactions addressed by Article 4(1)(f) the financial institution concerned (located either in a non-participating Member State or in a third country) has taken part in a transaction with a counterparty established in a participating Member State. By taking part in a financial transaction comprising a mutual exchange of values with that counterparty (see supra para. 21), the financial institution from outside the FTT jurisdiction, in the words of the German Bundesverfassungsgericht (see supra para. 15), contributes to the "achievement of a legally relevant result within the State" of the counterparty. For the same reason the financial institution is connected with the territory of that participating Member State through the object of the tax ("economic attachment"; see supra para. 16). 32. From the perspective of the financial institution, too, the relevant financial transaction is therefore "a transaction that occurs, originates, or terminates in the state 's territory or has some other substantial connection to the state" in the sense of 411(3)(b) of the American Law Institute's Restatement (see supra para. 18). Through its voluntary participation in such a financial transaction with a counterparty established in a participating Member State, the financial institution concerned subjects both the transaction and itself to the tax jurisdiction of that Member State. 33. The fact that the taxation of cross-border transactions and the parties to them is current practice and covered by the taxing State's jurisdiction is also confirmed by the American Law Institute's Comment no. 9 on 412, which points out that "states impose sales and excise duties or customs duties on transactions in or touching the state, regardless of the relationship between the participants and the state". Moreover, a striking example of such practice is the UK stamp duty reserve tax (SDRT), which applies, inter alia, to a transfer of shares linked to the UK even where the parties to that transfer are both resident outside the UK. 23 Hence, a transfer between two parties located in, e.g., France and Germany), would trigger SDRT liability in the UK. 23 See in this respect the explanations concerning the "Territorial scope of SDRT' in the official HMRC Stamp Duties Manual (http://www.hmrc.gov.uk/so/manual.pdf), para. 1.30: "SDRT applies to shares in UK companies and to shares in foreign companies if they are held on a UK register or if they are 'paired' with UK shares. It applies whether the deal is done in the UK or overseas and whether the people involved are UK resident or not. (...)". 9

34. And a second conclusion to be drawn is that the function of Article 4(1)(f) is not only to answer the question "which State is entitled to levy FTT" on a financial transaction (see supra para. 23), but also to provide an answer to a different, though equally pertinent question, namely "who is obliged to pay FTT" if it is due. In this regard, the rule is meant to ensure a link between the transaction that is subject to the above mentioned tax jurisdiction of a participating Member State on the one hand and, on the other, a given person, who is thus equally subject to this tax jurisdiction. 35. Last but not least it should be pointed out that the proposed FTT Directive has taken account of the possibility that, under atypical circumstances, an individual financial transaction may lack the necessary "nexus" required by international tax law. It is precisely for this reason that Article 4(3) states that "(n)otwithstanding paragraphs 1 and 2, a financial institution or a person who is not a financial institution shall not be deemed to be established within the meaning of those paragraphs, where the 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. It is obvious from its wording that this "escape clause" serves to avoid that the participating Member States apply the FTT regime to financial transactions which are not sufficiently connected with the territory of these States. Read together with Article 4(1) and Article 4(2), this clause makes clear that the proposed FTT Directive intends to fully respect the limitations set by customary international law to the exercise of tax jurisdiction. 24 37. Not quite comprehensible is in this respect the criticism of the Council LS which considers Article 4(3) to be "totally unsatisfactory" for the purpose of eliminating situations with insufficient nexus. The argument that this purpose should be pursued "at Union level, in the Directive,..., not at the level of the implementation of the Directive by Member States" (point 25), is based on the premiss that Article 4(3) is not merely an escape clause for excluding tax liability in very specific situations but, because of the "extraterritoriality" of Article 4(l)(f), is needed for the positive determination of such liability of financial institutions outside the FTT jurisdiction in all cases. As follows from the very terms of the rule, in combination of what has been explained above, this premiss is incorrect. 38. For similar reasons, it is not convincing to state that an application of the rule by those Member States "would foremost create considerable risk for litigation before the Court of Justice and ensuing legal insecurity" (point 25). Moreover, EU law does not require that the terms of secondary legislation are such as to eliminate any possible doubt in each and every single case. National courts have the possibility or even obligation to refer questions to the CJEU, 25 which then will settle the issue (in this particular case, paying due respect to the requirements of customary international law and international tax law). This system has proven capable of removing legal uncertainty, including in the area of indirect taxes. 24 For an example of the application of Article 4(3) see Commission, "FTT - additional analysis of impacts and further clarification of practical functioning", p. 21; (http://ec.ецгорa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/fact_sheet/technical_fiches.pdf). 25 Article 267 TFEU. 10

d) Irrelevance of the remaining arguments brought forward by the Council LS 39. In the light of the foregoing considerations, the statement of the Council LS that "the exercise of taxing jurisdiction in accordance with Article 4(1), point f) of the proposed Directive does not stand the test of territorial connection that the Union has defended, in particular, in the case of the Helms-Burton legislation, and exceeds the Union's legislative jurisdiction" (point 24), is puzzling. 40. To start with, it must be pointed out that the "test of territorial connection" applied by the EU with regard to its own legislative jurisdiction has most recently been explained in the concrete case of a Directive by the Court in Case C-366/10 Air Transport Association of America. 26 As Advocate General Kokott points out in her Opinion in that case, 27 this test is explicitly based on the connecting factors recognised by customary international law (see supra para. 7 in general and paras 14 et seq. with regard to taxation). And in addition it should be clear that there is no possible comparison between the FTT and the Helms Burton legislation, which provided for the institution of legal proceedings before the US courts against foreign persons or companies deemed to be trafficking in expropriated property in Cuba, which did not have any connection with the territorial competence of the US. 41. Against the background of such broad principles, it is difficult to maintain that the EU's legislative jurisdiction proceeds from "the basic predicament that entities must be subject to the laws of the country where they are located' and that exceptions are essentially linked with situations where the activities of the entity are largely directed, as in the Wood Pulp case, towards another territory" (point 24 28 ). This view disregards the broad scope of the territoriality principle (see supra para. 7), which today is by far the most important principle on which States can base their jurisdiction. In particular, if it were really true that a State may subject foreign entities to its own laws only where the activities of those entities are "largely directed" to that State's territory, a vast number of EU harmonization measures would potentially be invalid (for example, large parts of the VAT rules would be very problematic). 42. Since the essential premiss of the Council LS's Opinion regarding territoriality is incorrect, the specific assertions made in points 20-22 regarding the greater interest of other States are without foundation and in any event irrelevant. Nevertheless it is worth observing that once a State has territorial jurisdiction, it certainly does not "go without saying" that this State should abandon that competence to other States who may be thought to have a superior claim to the same tax base. Moreover, there is no reason to suppose that the country in which a financial institution is established is the only one in which it has contributed to the crisis or that other countries may not seek to discourage risky activities by all persons active on their markets, whether or not these persons are established in their territory. Finally, with regard to point 23, Article 4(l)(f) is not an anti-abuse measure but is part of the definition of the scope ratione personae of the tax. 26 See paras 121-130 of the Judgment of 21 December 2011, not yet reported in ECR. 27 Opinion of 6 October 2010, paras 149, 150 et seq., not yet reported in ECR. 28 The case referred to by the Council LS in this respect is CJEU, Judgment of 31 March 1993, Joined Cases C-89/85 et al., Ahlström Osakeyhtiö [1993] ECR I-1307. 11

2. Compatibility of Article 4(l)(f) with Article 327 TFEU 43. According to Article 327 TFEU, "(a)ny enhanced cooperation shall respect the competences, rights and obligations of those Member States which do not participate in it". The Council LS argues that this rule "entails the protection of the right of non participating Member States to maintain or adopt their own tax systems", and believes it to be violated through the allegedly illegal extraterritorial effects of Article 4(1)(f) of the proposed Directive (points 34-35). 44. In this respect the Council LS points out that Member States participating in the FTT had "resolved the issue of possible concurring taxation powers with respect to cross-border transactions and possible resulting double taxation by an allocation of taxing powers whereby taxing powers rest exclusively with the Member State of residence". As regards financial transactions involving financial institutions resident in non-participating Member States, on the other hand, "taxing powers of participating Member States would not rest with the Member State of residence of the financial transaction 29 but with the Member State of the counterparty" (points 35-36). This leads the Council LS to believe that, from the perspective of non-participating Member States, "the FTT would be applied in their territories", as it would be levied on financial institutions established there, and the "financial markets" of the latter Member States "would be burdened with the tax" (point 36). 45. The Council LS adds that in a situation where non-participating Member States maintain their own taxes on financial transactions next to the harmonized FTT of the participating Member States, "double tax relief would still result in the levying of tax by participating Member States with respect to situations that are the primary competence of non participating Member States". As a consequence, "(f)inancial transactions concluded by financial institutions in non participating Member States would still in a vast majority of cases contribute to the budget of participating Member States, while transactions by financial institutions resident in participating Member States would never contribute to the budget of another Member State" (point 36). 46. It is self-evidently true that a tax measure adopted in enhanced cooperation should not interfere with the right of non-participating Member States to maintain their own tax systems, and the proposed FTT does not do so. For the rest, the views expressed by the Council LS are unconvincing in particular because there is no such thing as the "primary competence of nonparticipating Member States". To start with, the "counterparty principle" laid down in Article 4(1)(f) does not have the consequence that FTT would be applied in the territories of nonparticipating Member States. As has been explained above (see supra paras 23 et seq.), Article 4(1) as a whole is based on the "nexus" between a given financial transaction and the territory of one of the participating Member States. The specific rule in Article 4(1)(f) is triggered only in situations where such a "nexus" exists and a participating Member State thus has tax jurisdiction over the financial transaction in question (see supra paras 26 et seq.). 47. The situation erroneously described by the Council LS as an application of the FTT in the territories of non-participating Member States is nothing other than the phenomenon that occurs in all cases where cross-border activities are simultaneously confronted with the legal systems of different States, namely "dual regulation" which, in the present context, takes the form of international double taxation. As has already been pointed, customary international 29 The term "transaction" should perhaps be read as meaning "institution" here. 12

law does not prevent the overlap of different national tax jurisdictions, and the general solution employed to remove or at least mitigate the negative effects of this overlap is the conclusion of double tax conventions (see supra para. 12). 48. More specifically as regards the relations between Member States, Advocate General Kokott has recently not only confirmed the above evaluation under customary international law but also added that "not even within the European Union is there a general ban on double taxation". 30 Indeed, the CJEU has consistently held that EU primary law rules do not prohibit double taxation by two different Member States. The Court has rejected such a prohibition both with regard to the non-discrimination clause for indirect taxes on goods (Article 110 TFEU), 31 and to the general free movement guarantees contained in the fundamental freedoms on persons, services and capital (Articles 45, 49, 56 and 63(1) TFEU). 49. In the latter context the Court has repeatedly emphasised that primary law cannot resolve the "adverse consequences" resulting from "the coexistence of national tax systems" and "the exercise in parallel by two Member States of their fiscal sovereignty", as it "does not lay down any general criteria for the attribution of areas of competence between the Member States in relation to the elimination of double taxation". 32 Hence, the TFEU as such does not oblige a Member State to adapt its own tax system to the systems of other Member States in order to eliminate such double taxation. 33 Rather, the negative effects of double taxation within the EU are to be tackled by secondary legislation in the form of harmonisation measures. 34 50. And this is exactly what the proposed FTT Directive is striving to achieve. It is a measure based on Article 113 TFEU which seeks "to ensure the establishment and the functioning of the internal market and to avoid distortion of competition" by harmonizing Member States' rules on taxes on financial transactions. Importantly, this harmonization contains clear rules on the allocation of taxing rights. The fact that the present proposal is dealt with under enhanced cooperation, 35 so that those rules on the allocation of taxing rights do not apply to all 28 Member States, does not affect the competences, rights or obligations of nonparticipating Member States and is thus not incompatible with Article 327 TFEU. 30 Advocate General Kokott, Opinion of 6 October 2010, C-366/10, Air Transport Association of America, not yet reported in ECR, para. 158 with footnote 139. 31 See, e.g., Judgment of 29 June 1978, 142/77, Statens Kontrol [1978] ECR 1543, paras 32 et seq.; Judgment of 5 December 1989, C-165/88, ORO Amsterdam Beheer BV [1989] ECR 4081, paras 12 et seq.; Judgment of 27 October 1993, C-72/92, Herbert Scharbatke GmbH [1993] ECR I-5509, paras 14 et seq. Compare also Advocate General Jacobs, Opinion of 13 November 1997, C-213/96, Outokumpu Oy [1998] ECR I-1777, paras 44 et seq. 32 See Judgment of 14 November 2006, C-513/04, Kerckhaert-Morres [2006] ECR I-10967, paras 20 et seq.; Judgment of 12 February 2009, C-67/08, Block [2009] ECR I-883, para. 30; Judgment of 16 July 2009, C-128/08, Damseaux [2009] ECR I-6823, paras 29 et seq. 33 See Judgment of 12 February 2009, C-67/08, Block [2009] ECR 1-883, para. 31. 34 See for the area of indirect taxes, e.g., CJEU, Judgment of 29 June 1978, 142/77, Statens Kontrol [1978] ECR 1543, para. 34; Advocate General Jacobs, Opinion of 13 November 1997, C-213/96, Outokumpu Oy [1998] ECR I-1777, para. 45. See for the area of direct taxation, e.g., CJEU, Judgment of 14 November 2006, C-513/04, Kerckhaert-Morres [2006] ECR I- 10967, paras 22 et seq.; Judgment of 20 May 2008, C-194/06, Orange European Smallcap Fund NV [2008] ECR I-3747, para. 32; Judgment of 12 February 2009, C-67/08, Block [2009] ECR I-883, para. 30; Judgment of 16 July 2009, C-128/08, Damseaux [2009] ECR I-6823, para. 29. 35 Council Decision of 22 January 2013 authorising enhanced cooperation in the area of financial transaction tax, OJ 2013 L 22/11. 13

51. Where double taxation occurs in the relationship with non-participating Member States, this is simply the consequence of parallel exercise of tax competence. Such exercise by participating Member States is no more incompatible with public international law than the parallel exercise by non-participating Member States, or indeed third countries (see supra paras 12, 47). The same is true in EU law. As the CJEU has held, the free movement and non-discrimination rules enshrined in the TFEU do not forbid double taxation. Nor do they require non-participating Member States to adapt their tax systems to the FTT system of the participating Member States in order to eliminate such double taxation supra paras 48-49). 52. Against this background it is wrong to assert that the "financial markets" of nonparticipating Member States "would be burdened" with the FTT (point 36). When financial institutions located in those Member States engage in cross-border financial transactions with a counterparty in a participating Member State, they no longer limit their activities to their home market, but in addition affect the financial market of a Member State applying the FTT. The tax does not create a burden for the financial markets of the non-participating Member States, but only for the activities of the financial institutions affecting the market of the participating Member State. 53. Financial institutions which engage in those activities must accept the consequence that the host Member State subjects them to its own regulations, and that the TFEU free movement rules do not guarantee the complete neutrality of cross-border activities as regards indirect taxation. 36 It should be clear, however, that any additional burden for the crossborder financial transaction in question would result from the application of the financial institution's home State's own tax legislation and cannot be attributed to any of the participating Member States. And based on the above analysis of international law (see supra paras 9 et seq.) it should also be clear that, contrary to the assertion of the Council LS (point 36), a "primary competence of non participating Member States" to tax such financial transactions simply does not exist. 54. Finally, the argument according to which "(f)inancial transactions concluded by financial institutions in non participating Member States would still in a vast majority of cases contribute to the budget of participating Member States, while transactions by financial institutions resident in participating Member States would never contribute to the budget of another Member State" (point 36), is incorrect. If there is a sufficient "nexus" between a transaction entered into by a financial institution resident in a participating Member State and the territory of a non-participating Member State, the latter State will have tax competence. If it chooses to exercise that competence, the transaction will contribute to its budget. In any event, what matters is that the proposal does not affect the liberty of non-participating Member States to create and maintain taxes on financial transactions. 55. The overall result of the foregoing analysis is therefore that the proposed Directive on enhanced cooperation in the area of FTT, and in particular its Article 4(1)(f), in no way encroaches upon "the competences, rights and obligations of those Member States which do not participate in it". Hence, the proposal is in full compliance with Article 327 TFEU. 36 See, e.g., CJEU, Judgment of 29 April 2004, C-387/01, Weigel [2004] ECR I-4981, para. 55; Judgment of 15 July 2004, C-362/02, Lindfors [2004] ECR I-7183, para. 34; Judgment of 12 July 2005, C-403/03, Schempp [2005] ECR I-6421, para. 45. 14

3. Compatibility of Article 4(l)(f) with other rules of EU primary law 56. As a final point the Council LS contends that Article 4(1)(f) of the proposed FTT Directive is "discriminatory and likely to lead to distortion of competition to the detriment of non participating Member States" (point 42). This criticism consists of different elements which are scattered throughout the Opinion. In detail, the Council LS addresses the "different treatment of resident and non-resident financial institutions as to the connecting factors applied" (points 26-32), the "distortion of competition" (point 39) and the "free movement of capital" (points 40-41). 57. It is not clear on which legal basis of EU law the Council LS challenges Article 4(l)(f) here. The starting point of the debate must be Article 326 TFEU, under which "(a)ny enhanced cooperation shall comply with the Treaties and Union law. Such cooperation shall not undermine the internal 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". a) Discrimination of financial institutions based on the connecting factors 58. The first issue addressed by the Council LS concerns the fact that Article 4(l)(f) applies only to financial institutions that are not established in a participating Member State. The Council LS believes this to be unlawful discrimination, on three grounds. 59. Based on the assumption that Article 4(l)(f) "leaves untaxed in the counterparty State transactions concluded by financial institutions that are residents of participating Member States", the Council LS first of all opposes this rule to the "residence principle" under Article 4(1)(a) to (e) (see supra para. 24) and criticises that, "in situations that are identical from a territorial point of view, transactions by non resident financial institutions are treated differently depending on whether the financial institution is established in another participating Member State (...) or in a country that does not participate in enhanced cooperation" (points 26, 28). According to the Council LS, the result of this is that "a participating Member State will receive FTT twice when a transaction is between a resident financial institution and a financial institution that is not established in a participating Member State, but only once when the transaction is between a resident financial institution and a financial institution resident in another participating Member State" (point 29). 60. In so far as the Council LS believes that to constitute discrimination in violation of one of the fundamental freedoms of the TFEU, be it the free movement of capital or the freedom to provide services (point 30 in fine and point 32 in fine), this view is incorrect. 61. To begin with, the Opinion of the Council LS does not present the full picture. It is true that in transactions between a resident financial institution and a financial institution resident in a non-participating Member State the participating Member State will be entitled to two payments of FTT (one from each institution, under Article 4(1)(a) to (e) and Article 4(1)(f) respectively), 37 whereas for transactions between a resident financial institution with a financial institution resident in another participating Member State the State of the first institution will be entitled only to one FTT payment (under Article 4(1)(a) to (e)). However, 37 See on the individual obligation of each financial institution to pay FTT also Article 10(1) of the proposal. 15

in the latter situation there will also be a FTT claim in the other participating Member State against the financial institution established there (likewise under Article 4(1)(a) to (e)). 62. In both situations there are two FTT claims. The only distinction between them is that in a transaction between two participating Member States there is a mechanism for the allocation of taxing rights. As already explained above (see supra paras 47 et seq.), the absence of such a mechanism in relations with non-participating Member States cannot be regarded as discrimination. 63. Apparently even the Council LS recognises that what is really at stake here is merely an "allocation of taxing powers". Yet it continues to insist on the discriminatory character of Article 4(1)(f) by bringing forward a second argument, alleging that "the different allocation of taxing powers entails discrimination of financial institutions in non participating States as to applicable FTT rates in the event that participating Member States would apply different rates". What appears to bother the Council LS in this respect is the fact that "financial institutions resident in the FTT jurisdiction would always be liable for FTT at the rate of the Member State of their residence", while "financial institutions not established in the FTT jurisdiction would in principle need to pay FTT at the rate set by the participating Member State of their counterparty" (point 31). 64. Yet, the fact that a financial institution resident in a participating Member State is always subject to that State's FTT rate while a non-established financial institution could face a range of 11 different FTT rates in the various participating Member States 38 cannot be considered discriminatory. These are mere disparities between the different national regimes which will always exist as long as not all tax systems of all Member States are fully harmonised. In this respect, too, the case-law of the CJEU leaves no doubt that these objective divergences between the legislation of different Member States do not constitute an infringement of the fundamental freedoms. 39 Otherwise, even the VAT Directive 40 would be invalid, since according to the theory advanced by the Council LS it entails discrimination against crossborder transactions. 65. In its third argument the Council LS once more refers to the "different allocation of taxing powers" and considers it to be discriminatory also from another perspective. The Council LS states that "residents of participating Member States (whether or not financial institutions) incur less risk of being held liable for the payment of FTT on the basis of the joint and several liability foreseen in Article 10(2) 41 of the proposed Directive when acting with a counterparty that is a financial institution resident in a participating Member State than with a counterparty that is a financial institution that is not a resident of a participating Member State" (point 32). This assertion is based on the Council LS's belief that "(a) financial institution that is a resident of a participating Member State is liable for FTT to that very 38 The proposed FTT Directive does not provide for a uniform tax rate in all participating Member States, but only for minimum tax rates; see Article 9(2). 39 See Judgment of 14 July 1994, C-379/92, Peralta [1994] ECR I-3453, para. 34; Judgment of 12 July 2005, C-403/03, Schempp [2005] ECR I-6421, para. 45. Compare also Judgment of 12 May 1998, C-336/96, Gilly [1998] ECR I-2793, paras 34, 47; Advocate General Mischo, Opinion of 26 January 1999, C-294/97, Eurowings Luftverkehrs AG [1999] ECR I-7447, para. 59. For a profound analysis of the issue of "disparities" (or "quasi-restrictions") see furthermore Advocate General Geelhoed, Opinion of 23 February 2006, C-374/04, Test Claimants in the ACT Group Litigation [2006] ECR I-11673, paras 42 et seq. 40 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, OJ 2006 L 347/1. 41 This provision should be read as "Article 10(3)". 16

Member State" and that "it is unlikely that the latter could not enforce payment of FTT on that institution and would need to resort to joint and several liability of the counterparty" (point 32). 66. This argumentation mixes up elements of "allocation of taxing powers" with the question how FTT may actually be enforced. In this respect it should be recalled that the risk of having to pay the FTT owed by the other party (necessarily a financial institution) under Article 10(3) relates to the tax burden in different States, and may arise in relation to transactions between participating States. 67. Moreover, it must be pointed out that the CJEU, in various judgments on the Treaty freedoms, has accepted that the legislation of a Member State, in order to be sufficiently effective in cross-border situations, may install specific procedural measures. 42 In particular, the Court has recognised that the difficulties to recover taxes abroad in the hands of nonresident taxpayers allow a Member State to have recourse to a resident counterparty in the relevant contractual relations, and to subject that counterparty to specific tax obligations such as, e.g., to withholding tax at source and being liable for that tax. 43 This possibility for Member States exists all the more in relation to third countries. 44 68. Against this background it should be obvious that a potentially higher risk run by counterparties resident in a participating Member State when engaging in financial transactions with financial institutions located in non-participating States, can a fortiori not be considered as prohibited discrimination. Once again, if the theory advanced by the Council LS were tenable, Articles 193 to 205 of the VAT Directive would be invalid. b) Distortion of competition 69. The second main issue mentioned by the Council LS focuses on the circumstance that, in the relation between EU Member States, "the implementation of FTT legislation and the recovery of taxes due are facilitated by the obligations of non participating Member States vis-à-vis participating Member States pursuant to primary and secondary Union legislation" (point 39, presumably referring to the mutual assistance directives 45 ). Since the same facilities do not exist in relation to third countries, the Council LS believes that the result may be "distortions of competition and of capital movement between financial institutions established in non participating Member States and financial institutions in third countries" (point 39). 70. However, the alleged distortions of competition feared by the Council LS (namely in relation between financial institutions located in non-participating Member States and those located in third countries) lie outside the scope of Article 326 TFEU, which is exclusively concerned with "trade between Member States" and "competition between them". For the 42 See, e.g most recently Judgment of 11 June 2009, Joined Cases C-155/08 and C-157/08, X and Passenheim-van Schoot [2009] ECR I-5093, paras 41 concerning extended tax recovery periods. Compare also in a more general sense Judgment of 26 October 1995, C-151/94, Commission v. Luxembourg [1995] ECR I-3685, para. 21. 43 See Judgment of 3 October 2006, C-290/04, FKP Scorpio Konzertproduktionen GmbH [2006] ECR I-9641, paras 35 et seq.; Judgment of 22 December 2008, C-282/07, Truck Center SA [2008] ECR I-10767, paras 47 et seq. 44 See CJEU, Judgment of 18 December 2007, C-101/05, A [2007] ECR I-11531, paras 60 et seq. 45 Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation, OJ 2011 L 64/1; Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures, OJ 2010 L 84/1. 17

rest, they are inherent in the absence of appropriate agreements with the third countries concerned. Since they do not reflect any violation of fundamental freedoms (see infra paras 71 et seq.), they cannot be criticised from an EU law perspective. It may be added that if the Council LS's theory were correct it would entail the invalidity of Directive 2011/16/EU, since it would entail, for example, discrimination in the enforcement of Member States' legislation on corporation tax. c) Obstacle to the free movement of capital (and services) 71. As a third and last issue the Council LS expresses concerns that Article 4(1)(f) of the proposed Directive "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 to that tax and to face, on these grounds, legal uncertainty and possible disputes with the authorities of the participating Member State" (point 40). Furthermore, the Council LS seems to believe that, "(a)s such, the tax would have an effect equivalent to that of a duty imposed in return of the possibility to enter into a transaction with an institution located in a participating Member State and would constitute an obstacle to the free movement of capital as well [as] to the freedom to provide services" (point 40). 72. As to the first line of argument, this is merely a repetition of arguments already brought forward, to which the answer has already been given (see supra paras 63 et seq.). 73. The second line of argument seems to be that the FTT "as such" would create an "obstacle to the free movement" of capital and/or services. If this were true, however, every single tax that affects cross-border activities would, by virtue of its mere existence, constitute an obstacle to free movement. Such a thesis cannot be maintained. According to the CJEU's case-law on double taxation: if the multiple tax burden created by two Member States together does not infringe upon the fundamental freedoms (see supra paras 45-46); it follows a fortiori that the tax burden caused by one single Member State cannot, "as such", violate any free movement rule. In reality, the fact that FTT would only exist in a harmonised form in the 11 participating Member States but not outside that FTT area, is merely a disparity which is neutral from the perspective of the Treaty freedoms (see supra para. 64). 46 74. Finally, the Council LS repeats itself once again when it refers to the "issue of implementation of the legislation to be adopted" pursuant to the proposed FTT Directive, claiming that a lack of enforceability of "legislation imposing fiscal obligations on persons outside the territory of the taxing State" would be "liable to create legal insecurity and to lead to distortions of competition" (point 42). As has already been explained above (see supra paras 69-70), such a situation even if it were plausible would not lead to a violation of EU primary law rules. 46 It should be mentioned that the CJEU, in the case of an Austrian stamp duty, seemed to have acknowledged that the mere existence of that duty might form an "obstacle" to the free movement of capital; see Judgment of 14 October 1999, C- 439/97, Sandoz GmbH [1999] ECR I-7041, paras 19-20. However, the Court (ibid., paras 23 et seq.) found that duty acceptable since the way it was structured it served the purpose to ensure that all residents engaging in certain financial transactions (in casu: loan contracts) "should be treated equally for tax purposes" and this is equivalent to what Article 4(1)(f) of the proposed FTT Directive is meant to achieve. In addition it must also be pointed out that the Sandoz case was also implicitly overruled as regards the idea that the mere existence of a duty could already be considered as a hindrance to free movement in the sense of the Treaty rules; see CJEU, Judgment of 29 April 2004, C-387/01, Weigel [2004] ECR I- 4981, paras 53 et seq., and Judgment of 15 July 2004, C-362/02, Lindfors [2004] ECR I-7183, para. 34. 18

IV. Conclusions 75. Based on the above analysis the Commission's services come to the conclusion that Article 4(1)(f) of the proposed FTT Directive is in conformity both with customary international law and EU primary law. 76. The "counterparty principle" enshrined in Article 4(1)(f) respects the generally accepted requirements of international law concerning the existence and exercise of tax jurisdiction and does not lead to any inadmissible extraterritorial effects of the FTT (see supra III.1). The Opinion of the Council LS is based almost entirely on the proposition that a State has no tax competence in circumstances where another State has a "more relevant interest". There is no such principle in public international law generally or in the law relating to tax competence in particular. 77. Furthermore, the proposed Article 4(l)(f) fully respects the competences, rights and obligations of Member States not participating in the enhanced cooperation on FTT and is therefore compatible with Article 327 TFEU (see supra III.2). The provision has no impact on the freedom of non-participating Member States to exercise their own tax competence in whatever manner they see fit. 78. Finally, Article 4(l)(f) is also perfectly in line with other rules of EU primary law, in particular with Article 326 TFEU and the fundamental freedoms (see supra III.3). It does not give rise to discrimination among financial institutions nor to distortion of competition between such institutions in the EU, since it merely concerns the allocation of taxing powers. What the Council LS perceives as discrimination is in reality nothing but a disparity between different national tax regimes. * * * 19