UK’s Stamp Duty Reserve Tax is incompatible with EU law, says the ECJ

On 1 October, the ECJ held, in HSBC Holdings plc, Vidacos Nominees Ltd v The Commissioners of Her Majesty’s Revenue & Customs, that the levying of stamp duty reserve tax on a transfer of shares in France as part of a cross-border acquisition, according to the Finance Act 1986, is incompatible with EU law. Consequently, the UK will have to change its stamp duty reserve tax (SDRT) regime for clearance services and depositary receipt regimes.

HSBC, in 2000, made a public offer to acquire the French bank Crédit Commercial de France (CCF). As part of the offer, HSBC issued around 250 million shares as consideration and arranged for the shares to be listed on the Paris Stock Exchange.

HSBC has paid SDRT arising on the issue of shares traded through Sicovam, the French settlement system for shares traded on the Paris Stock Exchange. Under section 96 of the FA 1986, a duty must be charged on the transfer for consideration or issue of uncertificated shares to the operator of a clearance service, at the rate of 1.5% of the issue price or the amount or value of the consideration.

HSBC shares were issued to a clearance service, Vidacos Nominees Ltd, Sicovam’s nominee for the UK, SDRT was payable at the rate of 1.5% of the price or value of those shares. Hence, pursuant to section 96(1) and (2) of the FA 1986, HSBC incurred £27m of SDRT upon the issue of its shares to SICOVAM through Vidacos Nominees Limited.

Consequently, HSBC have sought to recover Stamp Duty Reserve Tax levied on shares which were issued into Sicovam on the grounds that the charge is unlawful as it breached the Capital Duty Directive. HM Revenue & Customs has refused the claim, and HSBC appealed to the Special Commissioners. The Special Commissioners has referred the matter to the ECJ for a preliminary ruling.

The Court was, therefore, called to interpret Articles 10 and 11 of Council Directive concerning indirect taxes on the raising of capital in order to ascertain whether those provisions, prohibit the levying of a tax, such as stamp duty reserve tax, on the occasion of the issue of shares into a clearance service.

The Capital Duty Directive main aim is to prevent distortions of competition and interference with the free movement of capital. The directive abolished capital duty and provides for the abolition of indirect taxes with the same characteristics as the capital duty or the stamp duty on securities.

Nevertheless, article 12 of the directive provides for an exhaustive list of taxes and duties other than capital duty which may be imposed on capital companies. HMRC has argued that the 1.5% constituted an advance payment with regard to SDRT on future transfers of the shares which is allowed by article 12 of the Directive.

The ECJ has stressed that the term ‘transfer’, as referred in Article 12 , can not be interpreted as the UK proposed i.e. “that SDRT at the rate of 1.5% is a charge on share transfers in the form of a ‘season ticket’” as it “would have the consequence that issues could nevertheless be subject to a tax or duty, although they, while necessarily involving an acquisition of newly issued securities, must not, under that provision, be subject to any taxes or duties other than capital duty.”

According to the ECJ, a tax on the initial acquisition of securities immediately consequent upon their issue cannot fall within Article 12 derogations. Furthermore, the Court stated that “a tax such as SDRT cannot be considered, in reality, to apply to future transfers (…).”

The ECJ held, therefore, that, “to the extent that a tax such as SDRT is levied on new securities following an increase in capital, such a tax constitutes taxation for the purposes of Article 11(a) of the directive which is prohibited by that provision.”

The ECJ ruled that the UK’s levying of Stamp Duty Reserve Tax (SDRT) on UK companies raising capital outside the UK breaches European Community Law.

Obviously, the ECJ’s ruling will trigger further litigation. Other UK companies which have paid 1.5% SDRT charge where their shares have been issued into Europe are likely to follow HSBC’s steps and lodge claims for refunds.

According to Euroactiv Chris Morgan, KPMG's head of international corporate tax, said that the Treasury “will be expecting claims from taxpayers going back over the past six years but potentially such claims could go back as far as 1986.”

Following the Court's ruling, Revenue & Customs announced that it will no longer apply 1.5 per cent charge on the issue of shares into a clearance service within the EU. HMRC has stated that “(…) as the 1.5 per cent charge on issues into clearance services within the EU will no longer apply in future, the exemptions currently in place could mean for example that securities intended for the US market could be routed via a clearance service within the EU to avoid a stamp duty or SDRT charge.” The Government intends, therefore, to put forward legislation in order to “(…) prevent exploitation of the Stamp Duty and Stamp Duty Reserve Tax rules applying to transfers of shares between different clearance services and depositary receipts systems.”