EU financial tax is legal, commission lawyers say

They insisted that the tax had no effect on the right of governments to set national tax policies, stating that "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."

Legal wrangling has dogged the progress on a tax which has become to symbolize the battle between politicians and financial institutions on whether banks should pay their share towards the costs of the financial crisis.

The tax, which is intended to dampen speculation in the bond and derivatives markets, aims at making banks pay about €35 billion a year.

The EU executive scrapped initial plans for an pan-EU transactions tax in 2011/2 after a number of governments indicated that they would veto it.

It submitted its latest proposal in February, using the so-called 'enhanced procedure' which allows a group of EU countries to agree extra rules between them. The tax would apply, on their request, to eleven EU countries - Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

Representatives of the EU-11 will meet in Brussels next week to discuss progress on the tax as the legislative clock counts down to next May's European elections.

EU officials are hopeful that new impetus for the transactions tax will come from Germany's new coalition government, which has made the tax a political priority, and called for its remit to be expanded to cover currency trading.

The paper, which serves as a direct rebuttal to a legal opinion released in September by lawyers representing EU governments which had described the proposal as "not compatible" with EU law.

The opinion added that the tax "infringes upon the taxing competences of non-participating member states" and is "discriminatory and likely to lead to distortion of competition."

In response, the Commission paper concluded that "what the Council perceives as discrimination is in reality nothing but a disparity between different national tax regimes."

The proposed tax currently under discussion would be levied at a 0.1 percent rate for bond transactions and 0.01 percent for derivative trades, potentially also catching high-frequency trading.

However, some countries outside the EU-11 have complained about the "counterparty" and "residence" principles in the bill, claiming that this could force them to collect the tax but not keep it.

The UK, which has the largest financial services market in Europe, and Luxembourg, have filed legal challenges to the tax at the EU's top court.

For her part, Natalie Alonso, spokesperson for charity Oxfam, which has campaigned for the tax, said that the commission opinion "puts to bed any legal concerns about the financial transaction tax."