A decision of the European Court of Justice (ECJ) issued in the last quarter of 2009 gives rise to a right to reclaim UK stamp duty reserve tax (SDRT) (usually 1.5%) paid on the issue of UK securities into an EU clearance service or depositary receipt system. The right of recovery also potentially applies to UK bearer instrument duty payable on the issue of bearer shares. Even though the decision is based on EU law and stems from the EU’s Capital Duty Directive (Directive 69/335/EEC) (Directive), it may also extend to securities issued into a clearance service or a depositary receipt system outside the EU. In certain circumstances the ECJ’s decision may also extend to transfers (as opposed to issues) of securities into a clearance service or a depositary receipt system.
The case (HSBC Holdings plc and Vidacos Nominees Ltd v HMRC (Case C-569/07)) involved HSBC acquiring a French public company which was listed on the Paris Stock Exchange. Whilst the offer by HSBC included cash consideration, it also included a share exchange alternative. To make that offer more attractive, HSBC decided to secure a listing on the Paris Stock Exchange and the consideration shares were issued into a clearance service. HSBC paid SDRT at a rate of 1.5% to HM Revenue & Customs (the UK’s Tax Authority) (HMRC) in respect of the consideration shares. HSBC claimed repayment of the SDRT on the basis that the tax breached (i) the provisions of the Directive and (ii) HSBC’s fundamental rights under the EC Treaty.
The ECJ restricted itself to addressing the issues under the Directive, i.e. item (i) above. The ECJ noted that the Directive sought to promote the free movement of capital across the EU and in accordance with those objectives the Directive prohibited the imposition of a tax or duty on an issue of securities by a company. The ECJ therefore concluded that a charge to SDRT on the issue of shares into a clearance service was prohibited by the Directive and the clear implication was that this was so even if the securities so issued were in return for the purchase of other securities.
The decision of the ECJ was concerned solely with SDRT on the issue of securities into a clearance service within the EU. A similar charge existed in relation to the issue of securities into depositary receipt systems and HMRC has accepted that the decision in this case should also apply to depositary receipt systems. It is also arguable that UK bearer instrument duty (also charged at a rate of 1.5% of the value of the shares at the time of the issue by a UK incorporated company) could be successfully challenged on the same basis.
A further aspect of this decision which may be of interest is the territorial extent. The prohibition set out in the Directive does not set territorial limitations. This suggests that it does not make any difference whether the clearance service or depositary receipt system is inside or outside the EU. However, the ECJ adopts a “purposive” approach to interpreting EU legislation and may take into consideration the purpose of the Directive which is to promote the free movement of capital within the EU. Nevertheless, it is not clear whether the intention is merely to remove restrictions on movements of capital between EU Member States or also to promote neutrality as between the Member States from the viewpoint of non-EU investors, in which case the SDRT charge which still applies on transactions involving non-EU arrangements (such as US depositary receipt systems) remains inconsistent with EU law and may be subject to further challenge.
It may also be possible to challenge the imposition of SDRT on transfers of existing securities (as opposed to issues of new securities) into clearance services or depositary receipt systems. Although the ECJ decision did not specifically deal with transfers of securities, HMRC’s “season ticket” rationale for the SDRT charge on new issues has been rejected by the ECJ which may take a similar view of SDRT paid on transfers.
Anyone who has paid the taxes described above within the last six years may wish to consider making a claim for a refund of the SDRT they have paid. HMRC has invited refund claims which satisfy certain criteria and has issued guidance on the procedure for making such claims. It may also be possible to re-claim SDRT paid prior to the last six years but greater resistance from HMRC is likely in these cases.