The financial transaction tax (FTT), also known as the Robin Hood or Tobin tax, has been adopted by 11 of the EU member states but fiercely opposed by the UK Government which saw it as an attack on the City of London.
The 14-page legal opinion by the Commission’s own lawyers concludes that the move would exceed member states’ tax powers.
It also adds that the measure is “incompatible” with the EU treaty.
The EU Council legal service was also critical that only 11 EU members are signed up claiming that this would make the tax “discriminatory and likely to lead to distortion of competition to the detriment of non participating member states”.
There were concerns that the tax would hit the City even if the UK did not sign up to it if a British firm trades with branches of French or German banks based in the capital.
There were warnings that it could see financial services companies leaving London and other centres including Edinburgh.
It is understood the UK government is delighted by the legal advice.
A Treasury source said: “We have consistently opposed the European Commission’s FTT proposals and now the EU’s own legal advice shows that these proposals are likely to be both illegal and damaging to the EU’s economy. The opinion produced vindicates our decision to challenge the FTT in the European Court.”