British bank HSBC is in line for a 27 million sterling tax refund after the European Union's top court ruled a government stamp duty on new shares breaks EU law.
Europe's biggest bank, HSBC, argued in the European Court of Justice that when it bought French rival CCF in 2000, it had to pay a 1.5% stamp duty reserve tax on new shares it offered to CCF shareholders through a French clearing service.
The court said the duty contravened the EU's Capital Duty Directive in a ruling that British firms that have been involved in a cross-border takeover will study carefully.
Britain's Revenue and Customs said it would stop levying the 1.5% tax immediately on share transactions using a clearing service elsewhere in the EU pending a review.
"The government's policy position remains that transactions involving UK shares should bear their fair share of tax," a Revenue and Customs spokesman said.
UK to review stamp duty
"In light of today's judgement (2 October), we will determine whether and how to amend the stamp duty reserve tax 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," the spokesman added.
Revenue and Customs said the ruling will only hit a small part of the overall tax yield, estimated at "generally only tens of millions" of pounds a year.
HSBC welcomed the "favourable ruling from the European Court of Justice which clarifies the position on this issue".
The Luxembourg court said in its ruling the EU law "must be interpreted as meaning that it prohibits the levying of a duty such as that at issue in the main proceedings, on the issue of shares into a clearance service".
The EU rules seek to promote the free movement of capital across the 27-nation bloc but the stamp duty of 1.5% was higher than the 0.5% domestic British duty on share transactions, the court noted.
The HSBC shares for CCF stockholders came from an increase in capital and should not be taxed, the court said.
Potential for far-reaching consequences
Experts claim the British government's refunds could stretch back to 1986 and will potentially extend to shares en route to the US.
KPMG said claims for refunds from British companies who are expected to follow HSBC's example will run to between half a billion and one billion pounds.
Revenue and Customs insisted it would urgently propose legislation to ensure that the interim removal of the EU tax did not create a loophole enabling securities destined for the United States to avoid tax.
"This particular case concerned a European clearance system. But in our view the same principle should apply where shares have been issued into the US depositary receipt system. This means there is the potential for claims way beyond purely European cases," said Chris Morgan, KPMG's head of international corporate tax.
"HMRC (the UK Treasury) will be expecting claims from taxpayers going back over the past six years but potentially such claims could go back as far as 1986," Morgan said.
The stamp duty reserve tax affects cross-border merger and acquisitions when a British company offers shares through a foreign clearing company as part payment for the company it is buying.
(EURACTIV with Reuters.)