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ECJ rules against UK - tax on shares issued into clearance service unlawful
Practical Law UK Legal Update 1-500-4988 (Approx. 3 pages)
ECJ rules against UK - tax on shares issued into clearance service unlawful
by Dominic Stuttaford, Norton Rose LLP
| Published on 13 Sep 2013 |
This article is part of the PLC Global Finance September e-mail update for the United Kingdom.
Speedread
The ECJ has ruled that the UK levy of 1.5% stamp duty reserve tax on an issue of new shares into a clearance service contravened EU law. HMRC have accepted the ruling and suspended this tax in relation to shares issued into EU clearance services. Companies which have paid SDRT in similar circumstances can now consider making repayment claims.
On 1 October 2009, the European Court of Justice (ECJ) ruled in favour of HSBC that the imposition by the UK of a 1.5% stamp duty reserve tax (SDRT) charge where securities were issued into a clearance service breached the 1969 Capital Duties Directive (Directive).
In 2000, HSBC acquired a French bank, partly in exchange for an issue of shares. HSBC obtained a listing on the Paris stock exchange and issued consideration shares into the French clearance service. The bank paid SDRT at 1.5%, but claimed repayment of the tax on the ground that it was unlawful under the Directive which forbids any form of taxation of an issue of shares. (The Directive does allow tax on share transfers - the UK charges SDRT at 0.5% on transfers).
HMRC argued that the 1.5% charge on entry into the clearance service was not a capital duty but operated as a "season ticket" or advance payment of SDRT in relation to future share transfers within the service, which would otherwise escape the tax. This was rejected by the ECJ, which said that the charge had no relationship with hypothetical future transfers that might never occur. The charge was an unlawful capital duty.
On the same day, HMRC published a ministerial statement. The 1.5% tax was suspended with immediate effect in respect of shares issued into a clearance service within the EU. However the Government will amend the SDRT legislation (with effect backdated to 1 October 2009) to ensure that movements of shares into and within clearance services bear their "fair share" of tax while complying with EU law.
Specifically, the current SDRT exemptions (intended to prevent a double charge) for movements between clearance services, or between depositary receipt schemes, or from one to the other, will cease to apply where no tax was paid on entry. HMRC are concerned that otherwise, for example, securities intended for the US market could be routed via a clearance service in the EU to avoid the tax altogether.
Comments
The case raises the following issues for consideration:
- Issuers. This ruling is good news for issuers, who normally bear the SDRT cost. Any issuer who has paid the SDRT entry charge on issuing securities into an EU clearance service should consider a repayment claim.
- Depositary receipt systems. Although this case dealt only with the tax charge in relation to a clearance service, there is also a similar UK charge on issuing securities into a depositary receipt system. The latter charge now seems potentially indefensible, and those who have paid SDRT on entry into an EU depositary receipt system should equally consider a repayment claim.
- Territory. HMRC do not accept that this ruling applies in relation to a non-EU clearance service or a non-EU depositary receipt system. However an issuer who has paid the tax in such cases should consider lodging a claim.