Companies in Asia may be caught by the European Union’s proposed financial transaction tax (FTT), but it will be possible for them to seek an exemption, an EU tax commissioner said on a recent visit to Hong Kong.

But it remains unclear how the controversial levy – proposed at 0.1% for European bond and equity transactions and 0.01% for derivatives – will be applied.

Firms in Asia will be charged under the FTT should they “have an economic link with the territory of the tax area”, confirmed commissioner Algirdas Šemeta.

In an extreme example, a Hong Kong-domiciled fund buying Singapore-listed shares through an Asian subsidiary of a French broker could be hit with the charge because the fund is transacting with a counterparty in an FTT signatory country.

On May 5, 11 EU members, including France, Germany and Italy, reiterated their support for the FTT and committed to finalising negotiations on the tax by the end of the year and introducing the levy by January 1, 2016.

But there remains a question mark over how the exemption will work, noted Stéphane Karolczuk, head of the Hong Kong office at Luxembourg law firm Arendt and Medernach. It is not clear what a taxpayer will need to show as evidence to benefit from the exemption and therefore how the exemption will really work in practice, he said.

“Certainly, the contours of the exemption will have first to be politically agreed between [the 11 financial ministers]," he added. "The original position was probably a bit too extreme and they then kept a door open to certain exceptions and exemptions by including this wording which eventually will have to be clarified."

Elements of the tax under negotiation comprise the scope of instruments subject to tax and the terms of the taxation-source principle, said Šemeta – that is, whether it will be applied on place of residence or issuance.

He said the European Commission is likely to favour the residence principle, which would see the tax applied to both parties of a transaction if at least one of them were located in a participating member state. That means entities with no presence in the EU could be subject to the tax.

But Šemeta countered claims that the tax is extra-territorial: “According to our experts, the proposal is in full compliance with international taxation principles.”

These comments may have been a subtle rebuke of the UK, which challenged the legality of the tax in court. The European Court of Justice threw out the case on April 30 because the levy had not been implemented.

A technical note published in February by the European Commission said the tax “respects the requirements of international law” and “does not entail any impermissible extraterritorial effects”.

Under international law, as long as a connection between a country and the person or transaction it wishes to tax exists, the state has the right to exercise its tax jurisdiction.

“There are many opponents, but there are also many proponents of the tax,” said Šemeta.

“What is most important is that two thirds of [EU] citizens support the introduction of this tax because it allows us to reorient some financial activities and sectors to the financing of the real economy, which in the EU we have strong need of.”