LONDON A plan to tax financial transactions in 11 European Union member states from 2014 is illegal, the bloc's lawyers have concluded, dealing what could be a final blow to the measure as proposed.
The opinion is not binding and Germany which backs the tax aimed at making banks pay governments about 35 billion euros a year after receiving taxpayer aid during the 2007-09 financial crisis, said it still wants swift introduction of the levy.
But the conclusions of the 14-page legal opinion will make it harder to push the measure through in its current form, particularly since it is already fiercely opposed by several EU members including Britain, the bloc's largest financial centre.
EU finance ministers will consider the conclusions and decide whether to scrap the idea, refine the proposal or chose a simpler levy such as the stamp duty Britain imposes on shares.
Germany said the legal concerns must be "cleared up". The proposal needs the backing of all 11 governments if the tax is to be put in place.
Britain, 15 other EU member states refused to support the transaction tax proposal raising questions about how it would work with only some members participating.
Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia were planning to adopt the tax on stocks, bonds, derivatives, repurchase agreements and securities lending.
But the legal services for EU member states said in their opinion dated September 6 and obtained by Reuters that the transaction tax plan "exceeds member states' jurisdiction for taxation under the norms of international customary law".
The plan is also not compatible with the EU treaty "as it infringes upon the taxing competences of non participating member states", the document said.
A transaction tax only in some member states would also be "discriminatory and likely to lead to distortion of competition to the detriment of non participating member states".
The tax would also be an "obstacle" to the free movement of capital and services within the single market, breaching two tenets of the EU's founding treaty.
"I think a lot of jurisdictions have cold feet already and this is going to open themselves up to legal action by businesses and other governments," said Chas Roy-Chowdhury, head of taxation at the ACCA, an independent accounting body in London.
Ben Jones, a tax lawyer at Eversheds, said the opinion could give backers of the tax a political escape route to limit its scope or scrap it altogether.
"I hope this will lead Italian authorities to reconsider the need for this tax," added Gianluigi Gugliotta, head of Italian brokers' association Assosim.
But EU Tax Commissioner Algirdas Semeta, who drafted the plan, strongly disagrees with the opinion, his spokeswoman said.
"We stand firm that the proposed FTT is legally sound and fully in line with the EU treaties and international tax law," the spokeswoman added.
It was not clear when EU finance ministers would discuss the findings.
Germany has been one of the main backers of the transaction tax as a way of reducing ultra fast high-frequency trading that helped to fuel a brief stock market plunge on Wall Street. As Europe's largest economy, it was also unhappy at having at being a major contributor to bank bailouts.
"The German government advocates the swift introduction of the FTT for good reasons... Nothing has changed on that. The legal concerns must be cleared up and dispelled as quickly as possible," the finance ministry in Berlin said.
A Spanish treasury spokesman said the tax plan so far is "very generic" and "remains in the air" until a new proposal that works is presented by the European Commission.
Britain is challenging the transaction tax plan in the bloc's top court saying it was concerned it would affect transactions carried out beyond the borders of countries that sign up for it.
UK business lobby CBI said the opinion recognized the tax would damage growth and it was time to draw a line under the "flawed" proposal.
But the Robin Hood Tax campaign said the opinion was non-binding and may be no more than a temporary hurdle.
Faced with warnings from the industry that the tax could snarl up financing for the economy, there were already moves to scale back the levy and delay its roll out.
The EU lawyers say the tax would be unjustifiably imposed on firms outside the 11 participating states and hit the economy.
In addition, a "substantive" part of the financial institutions and types of transactions that would be taxed "have had no part whatsoever in the crisis and are not liable to contribute to any crisis in the future".
One aim of the tax is to cut high-risk trading.
The legal opinion said the levy would be imposed to a large extent on activities with a "genuine economic substance that are not liable to contribute to systemic risk and which are indispensable for the activities of non-financial business entities".