Plans for a European financial transactions tax (FTT) to be introduced next year have been attacked in a leaked memo from European Commission lawyers, which suggests the proposals may be illegal.

In a written opinion dated 6 September, the legal service of the EU Council, which represents the EU's 28 member countries, made clear that it deemed the FTT incompatible with EU law and likely to distort competition.

Eleven countries including France and Germany, but not the UK, have agreed to introduce FTT on shares, bonds and derivatives. There have already been disagreements about when the tax would come into effect, with the most likely date now mid-2014, as well as the tax rates which should apply.

These proposals were put forward under the 'enhanced cooperation procedure' which allows a grouping of at least nine EU countries to move forward on matters of common interest.

However, the leaked document memo says their plan 'exceeds member states' jurisdiction for taxation under the norms of international customary law' and is not compatible with the EU treaty 'as it infringes upon the taxing competences of non-participating member states'.

As such, the proposal was 'discriminatory' and, the memo said, raised 'issues of extra-territorial exercise of jurisdiction, disrespect of non-participating member states rights and compatibility with the principles of free movement of capital and discrimination.'

It states that: 'The FTT proposed will be levied not only on risky activities but to a large extent also 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.'

The 14-page document also casts doubt over the proposed 'residency principle', under which financial institutions would be taxed depending on where their headquarters are based, rather than where financial trades are executed.

A spokeswoman for Algirdas Semeta, the EU commissioner responsible for taxation said in a statement: 'We strongly disagree with the Council lawyers' opinion on the FTT (which incidentally only questions one part of the residence principle, and not the tax as a whole, or the procedure of enhanced cooperation).'

She said the Commission carried out 'a very thorough' legal analysis before presenting the proposal and stated: 'We stand firm that the proposed FTT is legally sound and fully in line with the EU treaties and international tax law. It does not pose the risk of discrimination against any member state - whether inside the FTT-zone or not.'

The UK lodged a formal complaint on the FTT before the European Court of Justice in Luxembourg in April this year. This centred on an attempt in the proposal to stop trades moving out of the so-called FTT zone to London or elsewhere if a party to the transaction was based in the FTT area, or acting on behalf of a party based there, thus ensuring the transaction would be taxed regardless of where it takes place.