HSBC Holdings Plc v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 February 2012 |
| Neutral Citation | [2012] UKFTT 163 (TC) |
| Date | 28 February 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 163 (TC)
Judge Barbara Mosedale, Anne Redston
I Glick QC, D Jowell QC and C Patton, Counsel, instructed by Norton Rose LLP appeared for the Appellants
J Swift QC, P Mantle and T Lall, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
SDRT - acquisition of target company as part of which overall transaction shares issued to exchange agent on trust for target's ex-shareholders and subsequently ADRs issued to target's ex-shareholders - whether SDRT charge on transfer of shares to issuer of ADRs was unlawful under the Capital Duties Directive and/or the Treaty - no reference to ECJ - appeal allowed
The First-tier Tribunal decided that the charged SDRT was contrary to Directive 69/335/EEC ("the Directive"), arts. 10 and 11. It also ruled that art. 12 of the Directive did not permit the same to be charged. Lastly, the Tribunal stated that since the charged SDRT was considered unlawful and not permitted under the Directive, the application of the alternative argument in Treaty on European Union, eu-directive 88/361 article 56art. 56 was not necessary but it also ruled that the charge was discriminatory.
The taxpayer financial institutions ("the taxpayers") appealed the relevant charges to stamp duty reserve tax ("SDRT") made by HMRC on American Depositary Receipt ("ADR") shares opted for by shareholders affected by the merger of the first taxpayer with another company.
The first taxpayer was a well-known financial institution registered in the UK. Its shares were traded on the London, Paris and Hong Kong stock markets. Because it was not registered in the United States, its shares were not and could not be traded on the New York Stock Exchange ("NYSE"). Instead, the taxpayer sponsored an ADR programme and the first taxpayer's American depositary shares were listed on the NYSE.
The contract with respect to the issuance of the first taxpayer's ADRs was set out in a tripartite deposit agreement. The parties to the deposit agreement were the first taxpayer, who issued the shares, the second taxpayer, who acted as depositary and who issued the ADRs, and the holders of the ADRs.
In another matter, a company called Household which incorporated under the laws of the State of Delaware, USA and was registered on the NYSE was acquired by the first taxpayer through its newly-formed subsidiary company called H2, in the concept of a merger. The merger agreement ceased the separate legal existence and cancelled all assets and liabilities of the Delaware-incorporated company.
In the agreement, all previously issued shares by the company were converted onto the right to receive the first taxpayer's shares. It had the appearance of a share for share exchange although under US law it was a merger and H2 did not actually acquire shares in the now-defunct company. Each shareholder of H2 was also given the right to elect to have, instead of the taxpayer's share, ADRs. The first taxpayer would appoint an exchange agent to administer the exchange, the exchange agent was to be the second taxpayer or another agent reasonably acceptable to Household.
The option for ADRs was given because many of the company's stockholders were US citizens who would find it preferable to hold securities which could be traded on US stockmarket: the ADRs could be traded on a US stock market but the first taxpayer's shares could not be so traded.
The allotment by the first taxpayer of 1,273,297,057 new US$0.50 shares consequent on the merger increased its share capital. The shares where then admitted to trading on the London Stock Exchange.
In the event, CTCNY was chosen to be the exchange agent. CTCNY was a trust company incorporated under the laws of the State of New York whose business was offering custodian services and acting as an exchange agent. CTCNY became the nominee for Household's stockholders for the newly-allotted 1,273,297,057 shares. The beneficial ownership of the shares was therefore with the former Household stockholders.
The former Household stockholders were sent an election form which gave them the power to opt to receive the first taxpayer's shares or to receive ADRs. If no election was made, the stockholder was deemed to have elected to receive the first taxpayer's shares.
As and when CTCNY received an election for ADRs, the second taxpayer issued to that stockholder the correct number of ADRs.
A flowback arrangement was then devised to utilise the second taxpayer's ability to pre-release the ADRs before the deposit of the shares. This, it was thought, avoided an SDRT liability on ADRs cancelled within the flowback period because the shares backing the ADRs would never be deposited with the second taxpayer and the chargeable event would never occur in respect of those shares. Only where the ADRs were not cancelled within the flowback period and the underlying shares actually deposited with the second taxpayer's nominees would SDRT be paid.
Anticipating elections to ADRs, three flowback periods were agreed. A total of some 645,069,915 shares were transferred by CTCNY to the second taxpayer's nominees and the parties agreed that under the provisions of Finance Act 1986 ("FA 1986"), Finance Act 1986 section 93 subsec-or-para 1s. 93(1) SDRT at the rate of 1.5 per cent was chargeable on these transfers.
The first taxpayer requested for and received clearance from HMRC with respect to the flow back arrangements.
As agreed with HMRC, the first taxpayer paid SDRT at 1.5 per cent on the value of shares. It was paid on the basis the chargeable event was the transfer by CTCNY to the second taxpayer's nominees.
In total, the first taxpayer paid £66,178,472.03 in tax arising out of the flowback arrangements.
In this appeal, the taxpayers questioned the SDRT charges made on the basis that the charges made for the transfer of shares to the second taxpayer's nominees were unlawful. Both taxpayers claimed for repayment for the amounts charged and paid under SDRT.
(2) Whether the SDRT charges were contrary to art. 11 of Directive 69/335/EEC ("the Directive"), art. 11 or were they permitted by art. 12 of the Directive.
(3) Whether the SDRT charges were contrary to the provisions of the Directive, art. 10 or were they permitted by art. 12 of the Directive.
(4) Whether the SDRT charges were incompatible with any relevant applicable right of either of the taxpayers under Treaty on European Union ("EC Treaty"), eu-treaty treaty subsec-or-para 1 article 56art. 56(1).
Held, allowing the appeal:
1.While the Tribunal discussed that the SDRT charges made against the taxpayers were covered under FA 1986, Finance Act 1986 section 93s. 93, arts. 10 and 11 of the Directive must be considered as well.
2.The Tribunal cited two cases involving the transfer of shares for the purpose of increasing capital and the eventual ruling in those cases by the CJEU, applying art. 11 of the Directive, was that based on European law, not only would the issue of the shares to CTCNY be exempt from tax under art. 11, but so would any subsequent transfer which formed an integral part of the overall transaction to raise capital for the first taxpayer and which formed an integral part of the process of giving to the investors the securities in return for their contribution of capital (EC Commission v BelgiumECAS (C-415/02) [2004] ECR I-7215 and HSBC Holdings plc & Vidacos Nominees Ltd v R & C CommrsECAS (Case C-569/07) [2010] BTC 13 considered).
3.The Tribunal then concluded that the transfer of the first taxpayer's shares from CTCNY to the second taxpayer's nominees was integral to the raising of new capital by the first taxpayer and therefore in taxing the transfer of shares from CTCNY to the nominees of the second taxpayer, the UK government acted in contravention of art. 11 of the Directive as the SDRT amounted to a tax on the issue of the shares of the first taxpayer.
4.With respect to art. 10, the Tribunal discussed its broader aspect than art. 11 of the Directive, given that the same prohibited any taxes whatsoever in respect to an increase in the capital of a capital company by contribution of assets of any kind. The Tribunal decided against HMRC and ruled that the taxpayers' contention was correct since the transfer of shares made by CTCNY to the nominees of the second taxpayer was in the course of the first taxpayer's increase in share capital. The transfer was part of the mechanism employed to deliver the agreed consideration, which was the option of ADRs, to the investors who were contributing capital. The SDRT charged was also ruled unlawful under the said article (Albert Reiss Beteiligungsgesellschaft mbH v Land Baden-WürttembergECAS (Case C-466/03) [2007] ECR I-5357 considered).
5.The Tribunal found that the SDRT on the transfer from CTCNY to the nominees of the second taxpayer was an integral part of the overall capital raising transaction entered into by the first taxpayer and therefore unlawful under arts. 10 and 11; neither was it relived by art. 12. The Tribunal stated that it gave something other than a literal reading of the said article as it involved relieving a transfer from tax, but based on case law, that it was correct to rule on this as it would otherwise defeat the purpose of the legislation. Therefore, it ruled that a tax on a transfer it already considered integral to the capital raising transaction would defeat the purpose of the Directive (Fuerzas Eléctricas de Catalunya SA (FECSA) v Departament d'Economía y Finances de la Generalitat de CatalunyaECAS (Case C-31/97) [1998] ECR I-6491 considered).
6.The taxpayers also raised the alternative issue of unlawfulness of the SDRT charge under the EC Treaty. The Tribunal stated that such argument was only relevant had the SDRT charge been found lawful under the Directive or if the Directive had limited territoriality which was decided as not applicable in this case. For the sake...
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