On 1 October 2009, the European Court of Justice (ECJ) held in HSBC Holdings plc (C-569/07) that the 1.5 per cent stamp duty reserve tax (SDRT) payable on the issue of shares into a clearance service is unlawful because it contravenes European Council Directive 69/335/EEC (the Capital Duty Directive) which prohibits indirect taxes on the raising of capital.
Consequently, UK companies that have previously paid such SDRT should consider whether to claim from HM Revenue & Customs (HMRC) a repayment of the SDRT paid.
HMRC has stated that, with effect from 1 October 2009, it will not seek to apply the 1.5 per cent SDRT on the issue of shares into a clearance service within the European Union. HMRC will also consider whether and how to amend the SDRT rules to ensure movements of shares into and within clearance services bear their fair share of tax, whilst ensuring the rules are compatible with Community law.
Article 11(a) of the Capital Duty Directive provides that member states may not tax "the creation, issue, admission to quotation on a stock exchange, making available on the market or dealing in stocks, shares or other securities of the same type". Clearance services are designed to facilitate the trading and settlement of securities. The UK’s Finance Act 1986 applies a 1.5 per cent SDRT charge on the issue or transfer of shares into a clearance service
In 2000, HSBC acquired all the shares of a French bank and obtained a listing on the Paris Stock Exchange of the shares it issued as consideration. HSBC was required to use a clearance service to obtain such listing and the Inland Revenue (as HMRC then was) taxed the transfer of the newly issued shares to the clearance service at 1.5 per cent.
In 2002, HSBC asked the Inland Revenue to refund the £27 million in SDRT paid on the transfers into the clearing system but the Inland Revenue refused. HSBC appealed to the UK Special Commissioners who, in turn, asked the European Court of Justice (ECJ) whether the 1.5 per cent SDRT violated European Union law.
The ECJ held that the SDRT charge on the issue of shares into a clearance service was contrary to article 11(a) of the Capital Duty Directive because the imposition of tax on the acquisition of securities newly issued on the occasion of a public offer constituted taxation on the initial acquisition of newly issued shares, which article 11(a) prohibits.
Wider Implications of the ECJ Decision
Although the HSBC Holdings plc decision applies to the issue of shares into a clearance service (i.e. the transfer of newly issued shares into the service), the ECJ’s Advocate General considered that the SDRT charge on the transfer of existing (i.e. not newly issued) shares to the service also contravened article 11(a) of the Capital Duty Directive. Unfortunately, the Special Commissioners did not refer to the ECJ the question of the validity of the latter charge and HMRC has chosen to follow the strict decision of the ECJ in not seeking to apply the 1.5 per cent SDRT to the issue of shares into a clearance service.
The UK’s Finance Act 1986 also applies a 1.5 per cent SDRT charge to the issue or transfer of shares to depositary receipt issuers (DRIs). It is questionable whether the charge to SDRT on the issue of shares to DRIs is valid in the light of the decision in HSBC Holdings plc. The Advocate General’s opinion in that case also calls into question the legality of the charge to SDRT on the transfer of existing shares to DRIs.
This may not be the end of the matter for either the clearance service SDRT charge or the charge applicable in respect of DRIs.