The First-Tier Tribunal (Tax) has given judgment allowing HSBC’s appeal against about £60m in stamp duty reserve tax (SDRT) charges, holding that the charges were contrary to EU law.
The SDRT charges arose in connection with HSBC’s acquisition of a US company called Household International Inc in 2003. In consideration for their stock, the Household stockholders received (at their election) either ordinary HSBC shares or HSBC American Depositary Receipts (ADRs). The ADRs, which were to be backed by HSBC shares held by a depositary bank, represented an interest in HSBC shares that could be freely traded on US stockmarkets. If the former Household stockholders elected to receive HSBC shares, no SDRT was payable. But if they elected for ADRs, SDRT was payable, unless the ADRs were cancelled in return for ordinary HSBC shares within a particular window of time (known as a “flowback period”).
The issue was whether the levying of SDRT amounted to a tax on the raising of capital contrary to articles 10 and 11 of the EC Capital Duties Directive and/or what is now article 63 of the Treaty on the Functioning of the European Union. HSBC contended that it was. HMRC contended that it was not, arguing that SDRT had been charged, not on the issue of the HSBC shares or ADRs, but on their transfer, and thus was permissible under article 12 of the Directive. The “transfer” point arose because the HSBC shares required to back the ADRs were initially issued to a custodian, and were only transferred to the depositary bank responsible for the ADR programme at the end of each flowback period.
The Tribunal ruled in favour of HSBC. Applying earlier decisions of the ECJ, it held that the transfer of the HSBC shares from the custodian to the depositary was integral to the raising of capital by HSBC. The SDRT charges were a tax on the raising of capital, contrary to articles 10 and 11 of the Directive. They were not a tax on the transfer of shares, and so were not permissible under article 12 of the Directive. The Tribunal further held that, in any event, the SDRT charges would have been contrary to article 63 of the Treaty.
See the full text of the judgment.
Ian Glick QC and Conall Patton acted for HSBC.