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 findings are not binding but will make it harder to introduce a measure backed by Germany and others to make banks pay governments about 35 billion euros a year after receiving taxpayer aid during the 2007-09 financial crisis.
The 14-page legal opinion will be put to EU finance ministers who must decide whether to scrap the idea or chose a simpler levy such as the stamp duty Britain imposes on shares.
Britain, the EU's biggest financial centre, and several other states, have opposed the transaction tax proposal. They refused to sign up to the plan, raising questions about how it would work with only some members participating.
(Read more: Tax EvasionDangerous for Europe: Schulz)
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 Sept. 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".
(Read more: Europe LooksSure to Gut Financial Transaction Tax)
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.
Eyes on Germany
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. Germany goes to the polls later this month.
"It will be interesting to see what happens to it after the German elections, to see where Germany then stands," Roy-Chowdhury said.
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.
(Read more: Italy launches tax on high-frequency transactions)
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".