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HMRC internal manual

Stamp Taxes on Shares Manual

Depositary receipt and clearance services: exemptions/reliefs: takeovers (share-for-share exchanges)

The provisions of FA86/S95 (3)-(6) and FA86/S97 (4)-(7) provide an exemption from a 1.5 per cent Stamp Duty Reserve Tax (SDRT) charge where a company (X) issues securities in exchange for shares in another company (Y) in connection with a company merger or take-over. To qualify for the exemption, there are a number of conditions, however, all of which have to be fulfilled. These are:

  • Company (X) must either have control of company (Y), or obtain control as a consequence of the exchange or of an offer as a result of which the exchange is made. Company (X) is taken to have control of company (Y) if it has (direct or indirect) power to control that company’s affairs by holding shares in, or has voting control, of that company; and
  • Shares in company (Y) are already held under a depositary receipt or clearance service scheme;
  • Company (X) must enter into an arrangement to issue new securities to the existing shareholders of company (Y), and the shares in company (Y) are cancelled.

The exemption can also apply where there is more than one company involved in the take-over of another, provided that one of the bidding companies will have full control of the target company. In this situation however, the exemption is restricted to the shares issued only by that controlling bidder.

Whether or not the above conditions are fulfilled, HM Revenue & Customs (HMRC) will not seek to collect 1.5 per cent SDRT on UK company (i.e. company (X)) shares that are issued to a depositary receipt issuer or to a clearance service located anywhere in the world following a ‘share for share exchange’ if, and only if, the shares issued by company (X) form part of that company’s capital raising arrangement. This is because, following the decisions by the European Court of Justice (ECJ) in October 2009 in the case of HSBC Holdings PLC and Vidacos Nominees Ltd v Commissioners for HM Revenue & Customs(C569/07), and the First-Tier Tribunal (Tax Chamber) in March 2012 in the case of HSBC Holdings PLC and the Bank of New York Mellon Corporation v Commissioners for HM Revenue & Customs (TC/2009/16584), HM Revenue & Customs (HMRC) accepts that the charging of 1.5 per cent SDRT on United Kingdom (UK) incorporated company share issues is incompatible with European Union law.

This effectively means that where ‘share for share’ exchanges in connection with a company merger or take-over are undertaken, which result in an acquiring company (‘company (X)’) issuing securities) in exchange for shares in another company (‘company (Y)’), and the issued securities are simultaneously deposited, pursuant to an arrangement, with a depositary receipt issuer or clearance service, no 1.5 per cent SDRT charge will generally arise.