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Europe’s Financial Transaction Tax Could Be Boost to Loan Market

The European Union’s proposed tax on financial transactions could benefit the region’s loan market, which would be exempt from the charge.

“The financial transaction tax includes all financial instruments and derivatives, but not loans,” according to a report from Clifford Chance LLP written by attorneys led by Dan Neidle, a London-based tax lawyer. “The pricing of corporate and government bonds may reflect direct and indirect FTT charges, and this may cause a move by corporates away from bond financing and towards loan financing,” it said.

The EU is trying to curb what it sees as a “patchwork” of local levies with a tax that it believes could raise 30 billion euros ($40 billion) to 35 billion euros a year. Today’s plan would set a rate of 0.1 percent for stock and bond trades and 0.01 percent on derivatives trades.

“The FTT will not apply to day-to-day financial activities of citizens and businesses in order to protect the real economy,” the European Commission said in a statement. “Traditional investment banking activities” such as raising capital or restructuring deals will also be exempt, the Commission said.

The tax could be collected worldwide as soon as the start of next year by the 11 nations that have so far signed up to participate. French and German banks’ London branches would be fully subject to the tax despite opposition to the charge from the U.K. government, according to the Clifford Chance report.

Companies may stop raising floating-rate interest loans and entering into swap transactions to make them fixed-rate because of the tax, Clifford Chance said.

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