On 1 October 2009, the ECJ ruled in HSBC Holdings plc and Vidacos Nominees Ltd v HMRC (C-569/07) that the 1.5% ‘entry ticket’ SDRT charge for UK issues of chargeable securities into clearance services (e.g. Euroclear, Clearstream) was contrary to EU law – more specifically, Article 11 of Directive 69/335/EEC, which forbids at EU level the imposition of taxes and capital duties on intra-EU securities issues.
Since the ECJ ruling, HMRC has permitted UK-based issuers to reclaim any 1.5% Stamp Duty Reserve Tax (SDRT) charges paid on issues of chargeable securities into clearance services or depositary receipt systems within 6 years from the later of the SDRT payment date or the ‘accountable date’ as per the SDRT Regulations. Before the ECJ ruling, issues of UK securities into clearance services and depositary receipt systems were subject to SDRT at 1.5%, which was typically borne by the issuer. Subsequent transfers between clearance services and depositary receipt systems were exempt from SDRT. Despite its acceptance of the ECJ’s decision, HMRC feared that issuers of securities intended for the US market would take advantage of the combined effect of the ECJ ruling and the existing exemption by routing the securities through EU-based systems in order to avoid SDRT, which was not an intended consequence of the legislation. In an attempt to forestall such activity, HMRC announced measures to impose SDRT charges on subsequent transfers of chargeable securities from EU clearance services / depositary receipt systems to non-EU equivalents. These measures have since appeared in Finance Act 2010 with retrospective effect from the date of the ruling.
A question on some people’s minds at the moment is whether the ECJ decision could have wider-reaching implications and, in particular, whether it could impact the current 1.5% SDRT charge on issues of bearer instruments (‘bearer duty’), including bearer bonds. A few practitioners have raised the issue but not yet attempted to address it fully.
The current legislation under paragraph 1(1) Schedule 15 Finance Act 1999 imposes a 1.5% charge on i) issues of bearer instruments in the UK; and ii) issues by (or on behalf of) UK companies of bearer instruments outside the UK. (The charge will not apply if the bearer instruments meet any of the exemptions listed in Part II of Schedule 15, the most obvious of which is the non-sterling denomination exemption).
A ‘bearer instrument’ is broadly defined as any marketable security transferable by delivery; a share warrant or stock certificate to bearer; or any other instrument to bearer by means of which stock can be transferred. The word ‘stock’ includes securities for these purposes, and so can include bearer bonds.
Herbert Smith and others have suggested that the 1.5% bearer duty may also be illegal. Sterling-denominated bearer bonds are often issued by UK companies into the international capital markets, and any 1.5% bearer duty thereon may fall foul of Article 11 Directive 69/335/EEC if EU investors are involved. However, whether HMRC intends to address this issue will depend on whether HMRC sees it as a priority, even though there are strong EU law arguments for abolishing it.
In a climate of offshore asset disclosure and tax information exchange, HMRC may well be reluctant to get rid of bearer duty on the grounds that bearer instruments have traditionally been viewed as a means of preserving investor anonymity and hence a means of avoiding tax. The US largely favors registration, as evidenced by the US government’s recent proposal to repeal certain ‘safe harbor’ provisions that enabled US bearer bonds meeting certain criteria to benefit from various tax reliefs and exemptions. In this regard, HMRC may well take a similar attitude the to US.
That said, many EU jurisdictions permit the issue of bearer instruments. The anonymity point is addressed by appropriate custodial and money laundering requirements to establish the identity of the bearer holder, which weakens any argument that HMRC might put forward for failing to address the legality of bearer duty.