On 19 October 2017, the ECJ held12 that UK legislation imposing a 1.5% stamp duty charge on transfers of shares to clearance services (section 70 Finance Act 1986) was contrary to EU law, where the transfer took place for the sole purpose of (1) listing the shares on a stock exchange, or (2) offering new shares for purchase.
Air Berlin (AB), incorporated in the UK, in 2006 undertook an IPO on the Frankfurt Stock Exchange. In order to do so, as required under German law, legal title to all of AB’s existing ordinary shares (including those not to be offered as part of the IPO) had to be transferred to Clearstream in Frankfurt. Under UK law (section 70 of FA 1986) this gave rise to stamp duty of 1.5% on the market value of the shares.
Then, a few years later in 2009, AB issued a further tranche of new shares. Again, it was necessary to first transfer legal title to the new shares to Clearstream Frankfurt. HMRC again charged stamp duty at 1.5% of the market value of the shares.
The ECJ has now found that each of these charges are contrary to EU law as:
• In respect of the 2006 IPO, there was no change in the beneficial ownership of the shares. The transfer was merely incidental, integral to the act of listing the shares on the Frankfurt Stock Exchange. A charge to stamp duty would therefore be contrary to Article 11 of Directive 69/335.
• In 2009, although the transfer of legal title was subsequent to the issue of the new shares, Article 5 of Directive 2008/7 precluded the taxation of any new issue of shares which must also preclude tax on the first acquisition of shares immediately consequent upon their issue.
HMRC has accepted that the section 70 charge cannot apply to share issues (see here) but, so far, has maintained that previous decisions in this area have no bearing on transfers of shares to clearance services (and depositary receipt systems) that are not an integral part of a share capital issue. This ECJ decision suggests that HMRC may lose the group litigation order granted to resolve this issue.
The decision can be viewed here.