The recent First Tier Tribunal decision in HSBC Holdings Plc and The Bank of New York Mellon Corporation v The Commissioners for Her Majesty’s Revenue & Customs brings positive news for UK companies aiming to undertake a fundraise or listing outside the EU involving the use of overseas depositary or clearance systems.

Subject to an appeal by Her Majesty’s Revenue & Customs (HMRC), the current 1.5% stamp duty reserve tax (SDRT) charge on fundraisings by UK companies involving the use of non-EU depositary or clearance systems will no longer apply making non-EU fundraising and listings more attractive and increasing the fungibility of the shares of UK companies with non-EU dual listings, including those listed in London and Toronto.

Pending any HMRC appeal, companies may choose not to pay the applicable duty although they could be faced with a claim for its payment (together with penalties and interest) if HMRC are successful on any appeal ultimately brought.


SDRT at 1.5% is payable in the United Kingdom if shares of a UK company are issued or transferred into a clearance or depositary system. This charge, which is intended to compensate for the non-payment of stamp duty on transfers within clearance or depositary systems, has been seen as a hindrance for UK companies wishing to raise funding or list on overseas markets (such as the Toronto Stock Exchange) where the use of local clearance systems (such as CDS) for the holding of or settlement of transactions in shares is required or expected. UK companies can be faced with having to bear the 1.5% duty as part of the cost of any such funding or listing.

In 2009 it was established that the 1.5% duty could not be applied to UK shares which go into clearance or depositary systems in the European Union. The Tribunal ruling extends this prohibition to the use of clearance and depositary systems outside the European Union and so removing a potential funding cost of overseas listings by UK companies.

The Tribunal held that where the transfer of existing shares into a depositary receipt system forms an integral part of a capital-raising transaction by a European company, only taxes in accordance with the EU Capital Duty Directive (the Directive) may be imposed and the imposition in the United Kingdom of SDRT at a rate of 1.5% is a contravention of EU law. The Tribunal also found that the SDRT charge was contrary to the freedom of movement of capital under the EU Treaty.

The decision further confirmed that:

  • the imposition of SDRT regarding the issuance of depository receipts under s.93 of the Finance Act 1986 (UK) contravenes EU law (specifically Article 10 and 11 which stipulate, respectively, that a tax on the increase in capital of a company or on the issue of shares is unlawful) if the tax is imposed in relation to the raising of capital by a European company even if the depository happens to be outside of the EU;  
  • Article 12 of the Directive, which permits the charging of “duties on the transfer of securities” must be construed narrowly and does not save the imposition of SDRT in this circumstance, as the transfer in this case was an “integral part” of the raising of capital.  In defining “integral” the court found that:
    • any element of the transaction by which capital actually was raised is an integral part of the transaction;  
    • it does not matter that an element of the transaction was not essential in the sense that the overall transaction could have been structured differently so as not to include a transfer;  
    • the test for whether a transfer was integral is objective and the taxpayer’s motivation in structuring the transaction is irrelevant;  
  • the location of the taxpayer is not determinative of the territorial scope of the Directive; rather the important point is whether a European company is raising the capital because the Directive refers to how member states can tax EU resident companies without any reference to the residence of the investors.

Implications of the Decision

Should this decision prove final, UK companies will be able to structure capital-raising activities within and outside the EU in a manner that will not trigger the 1.5% SDRT charge.  For a UK company wishing to list on, for example, the Toronto Stock Exchange, it will be able to deliver shares into CDS and those shares may then be dealt with within CDS without any SDRT being payable. This should increase the attraction of such listings for UK companies and ought, for dual listed companies, to increase the fungibility of their shares between markets.

Although HMRC is currently considering whether they wish to appeal the decision, HMRC has not previously sought to appeal decisions which ruled that the 1.5% charge was not applicable when shares are issued or transferred into European Union clearance and depositary systems.  Whilst HMRC decides whether to appeal, no repayments of SDRT will be made.  If the Tribunal decision becomes final, HMRC will publish guidance on how claims for repayment of incorrectly paid SDRT can be submitted. Pending that decision, HMRC has announced that it will not take active steps to recover applicable SDRT although, if it succeeds. HMRC could seek payment of the unpaid duty (together with any applicable penalty and interest).