Share and share alike: restitution on overpaid stamp duty reserve tax

Curia: logo of ECJ, via the ECJ site.Cases from the European Court of Justice, holding that national tax provisions are inconsistent with EU law, just seem to keep on coming. The most recent is a decision of the ECJ yesterday in Case C-569/07 HSBC Holdings plc and Vidacos Nominees Ltd v The Commissioners of Her Majesty’s Revenue & Customs, which held that the levying of stamp duty reserve tax on a transfer of shares in France as part of a cross-border acquisition, pursuant to section 96 of the Finance Act 1986, was inconsistent with EU law (in particular, Article 11(a) of Council Directive 69/335/EEC of 17 July 1969 (pdf) concerning indirect taxes on the raising of capital, as amended by Council Directive 85/303/EEC of 10 June 1985). The Guardian‘s report of the case is typically angst-ridden:

Treasury faces £5bn bill over European tax ruling

European court judgment over UK tax on firms that issue new shares abroad could be costly for British government

The taxpayer faces a bill potentially as high as £5bn following an obscure tax ruling on the issuance of shares by companies made today by the European court of justice. HSBC won an award of £27m plus interest from Revenue & Customs, after a long-running case in which the bank argued that the 1.5% tax it had been forced to pay on new shares it issued in 2000 in France broke EU law. … But the court ruled in HSBC’s favour and said that the tax contravened the EU’s capital duty directive. Revenue & Customs said it would stop levying the tax immediately, but would seek other ways to claw back the lost revenue. …

Craig Leslie, head of stamp taxes at PricewaterhouseCoopers, said that the refunds for taxes paid on share issuance in Europe were likely to be in the region of £1bn. But he added that the court ruling would open the way to further challenges by companies that had issued shares in the United States, and the figure could easily jump to about £5bn, given that shares issuance by British companies in the US was much larger than in the rest of Europe. …

The Independent and the Financial Times both quote the £5bn figure; however, more apocalyptically, the Telegraph reports that it could cost $20bn; the Daily Mail (gleefully) reported it as another headache for the Chancellor; whilst the Wall Street Journal was more restrained, simply referring to a significant tax loss for UK authorities. The Times observed that this is the latest in a series of legal defeats for HMRC, giving rise to many refund claims which must be paid with compound rather than simple interest. The pending appeals in the FII and Chalke cases should sort out the principles on which Revenue & Customs will have to make restitution plus interest.

The aim of Directive 69/335/EEC is to promote the free movement of capital, in part by prohibiting indirect taxes with the same characteristics as the capital duty or the stamp duty on securities whose retention might frustrate that free movement. Hence, Article 11 of the Directive provides that Member States cannot charge tax on “the creation, issue, … or dealing in stocks, shares or other securities”; however, Article 12(1)(a) goes on to provide that Member States may charge “duties on the transfer of securities”. In HSBC Holdings, a UK bank, HSBC, made a bid – partly in cash, and partly on the basis of a share swap – to take over a French bank, CCF. After the bid was accepted, HSBC shares were transferred to CCF shareholders via Sicovam (the French settlement system at the time, equivalent to CREST); and – to sweeten the pill for the CCF shareholders – HSBC paid the stamp duty reserve tax that arose on the transfers. Having paid, HSBC argued that the stamp duty reserve tax was within the prohibition in Article 11(a), whilst the Revenue sought to rely on the exemption in Article 12(1)(a). The ECJ held (at para [34])) that Articles 11(a) and 12(1)(a) established a clear distinction between the concepts of ‘issue’ and ‘transfer’, and continued:

[35]. Therefore, the initial acquisition of securities immediately consequent upon their issue cannot be considered to constitute a ‘transfer’ within the meaning of Article 12(1)(a) of the Directive, and, accordingly, a tax on that initial acquisition cannot fall within the derogation under that provision. …

[37]. In the light of those considerations, it must be held 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.

Stamp duty of share transfers in Ireland applies to transfers of shares in Irish incorporated companies, whether that transfer is executed in Ireland or abroad, and, at 1%, it is the highest rate in the EU. How vulnerable is it in relation to cross-border transactions after the HSBC decision?