Validity of UK stamp duties on the issue of shares into a depositary receipt system: UK 1.5% “season ticket” charge in breach of European law

Sullivan & Cromwell LLP - April 5, 2012
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The courts have dealt another blow to the UK’s stamp duty reserve tax regime. The UK First-tier Tax Tribunal has determined that the 1.5% “season ticket” charge on the issue of shares of a company established in an EU member state to a depositary receipt system in the US is in breach of European law. This decision follows the October 2009 judgment of the European Court of Justice that the 1.5% season ticket charge on the issue of shares into a clearance service is contrary to European law.

The Tribunal also considered the nature of the interest of a holder of American Depositary Receipts. For the Tribunal, this was a question of fact, since a UK Tribunal cannot provide definitive rulings on matters of US law. The Tribunal found on the evidence presented to it that the rights of holders of ADRs are contractual, and could not conclude that holders of ADRs have, for UK legal purposes, a beneficial interest in the underlying shares in the ADR programme. This is of course not conclusive of the US legal position and leading US counsel may well differ from the Tribunal on the point.

HM Revenue & Customs have announced that they are considering whether to appeal the decision of the Tribunal. In the meantime, no repayments will be made to taxpayers who have incurred the 1.5% stamp duty reserve tax charge on the issue of shares into a depositary receipt system. However, it may be advisable for taxpayers who have not already done so to file a protective refund claim in the event the decision of the Tribunal becomes final, or any appeal by HM Revenue & Customs fails.