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HM Revenue and Customs Brief 14/12

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HM Revenue and Customs -Tax Authorities

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Issued 15 May 2012

Beneficial ownership and Depositary Receipts

1. Introduction

The recent First Tier Tribunal (FTT) case involving Stamp Duty Reserve Tax (SDRT), HSBC Holdings and Bank of New York Mellon v HMRC (the ‘HSBC & BNY case’) included consideration of who held beneficial ownership of HSBC shares in respect of which the Bank of New York (BNY) had issued American Depositary Receipts (ADRs). The contractual arrangements under which the ADRs were issued were governed by the law of the State of New York (NY), with only the exchange agency agreement being governed by English law.

Having reviewed areas of conflicting evidence of two witnesses expert in the application of the NY State law to ADRs, the FTT decision records that the tribunal was not satisfied, as a matter of fact, that under NY State law the holder of an ADR has a beneficial interest in the underlying shares.

The decision has raised concerns about HMRC’s treatment of ADRs and other types of Depositary Receipt (DR) for the purposes of direct taxes. HM Revenue & Customs (HMRC) longstanding practice has been to regard a DR holder as having beneficial ownership of the underlying shares and the tax treatment of acquisitions and disposals, rights of ownership, and income derived from DRs have been consistent with this view.

This note clarifies the extent to which that treatment will continue following the HSBC & BNY case.

2. HMRC approach to Depositary Receipts

The FTT decision in HSBC & BNY was based on findings of fact about the application of NY State law to the specific HSBC ADRs. The FTT concluded that beneficial ownership provided by the ADRs in the underlying shares was not retained and this conclusion impacted on their interpretation of English law in the particular case.

The decision has created some uncertainty with the conflicting expert evidence on NY State law in the case indicating that the position on the attribution of beneficial ownership of shares underlying an ADR was unresolved, and, in respect of the consequential interpretation of English law, the FTT decision is not a binding precedent in relation to other cases.

As the FTT decision in the HSBC & BNY case (in particular the FTT’s conclusion on the position in English law) is not binding in relation to other cases, for tax purposes HMRC will continue to treat ADRs as conferring beneficial ownership as according to its established interpretation of the principles of English law.

HMRC guidance will be amended shortly to reflect this clarification. An advance copy of the amended material can be found in Appendix A but please note that this may differ in minor respects from the paragraph which we finally publish.

Appendix A: advance copy of amended guidance CG50240 - definitions: Depositary Receipts

You may come across assets referred to as Depositary Receipts (DRs). The commonest are American Depositary Receipts (ADRs).

DRs are used as substitute instruments indicating ownership of securities such as shares. Although DRs may be owned by anyone, they are designed primarily to enable investors to hold and deal in shares of companies located in countries other than their own. Such activities might otherwise be inhibited by difficulties in transferring original share certificates from one country to another. The investors hold or trade the DRs rather than the share certificates themselves.

A person holding shares for which DRs are available can convert them into DR form by depositing the share certificates with a local branch of a depositary (a financial institution such as a bank). The depositary issues a DR. This document certifies that the depositary, or an appointed custodian in the country of the underlying shares, holds the share certificates and that the owner of the DR is entitled to the share certificates on surrender of the DR. The precise detail of the arrangements may vary, but the holder of a DR will generally have many of the benefits associated with share ownership. In particular:

  • the DR can be exchanged for the underlying shares on demand by the DR holder
  • any dividends, subject to a handling fee, flow through to the DR holder
  • the holder of shares in DR form may at any time cancel the arrangement by asking for delivery of the share certificates in respect of their underlying shares, and surrendering the DRs at a local branch of the depositary

This guidance applies to DRs that display such characteristics.

We have been asked to clarify how holding shares via DRs will affect liability to Capital Gains Tax or Corporation Tax on chargeable gains following the decision of the First Tier Tribunal in the Stamp Duty Reserve Tax case of HSBC v Commissioners for HMRC, (2012) UKFTT 163 (TC).

UK-issued DRs Issued 15 May 2012

Where a DR is issued in the UK the HMRC view is that the holder of a DR is the beneficial owner of the underlying shares. The practical implications include that:

  • a transfer of shares by a shareholder to a depositary in exchange for an issue of DRs is not a disposal of the shares for capital gains purposes because the shareholder retains beneficial ownership of the shares
  • a disposal of the DRs is a disposal of both the DRs themselves and a disposal of the underlying shares. In practice the value of a DR will track the value of the underlying shares very closely and to that extent the consideration for the disposal of the DRs should be regarded as consideration for the disposal of the shares
  • in a share exchange or company reconstruction in which shareholders have an option to receive DRs instead of being issued with shares we accept that the shares are to be treated for the purposes of TCGA92/S135 as being issued to the shareholders, see CG52500+

DRs issued outside UK

Where a DR is issued outside the UK the question of whether the holder of the DR is the beneficial owner of the underlying shares will be determined by reference to the law of the territory in which the DR is issued. Information on beneficial ownership may be provided to investors by the depositary.

Beneficial ownership not conclusively determined by overseas law

Where beneficial ownership of the underlying shares cannot conclusively be determined by reference to the law governing the arrangements relating to the issue of the DRs, for tax purposes HMRC will continue to determine beneficial ownership according to its understanding of the principles of UK law. This means that HMRC will continue to apply its longstanding practice of regarding the holder of a DR as holding the beneficial interest in the underlying shares.

The ADRs referred to in the HSBC decision fall into this category.

Beneficial ownership determined by overseas law

Where the relevant law means that the holder of a DR is not the beneficial owner of the underlying shares the practical implications include that:

  • a transfer of shares by a shareholder to a depositary in exchange for an issue of DRs is a disposal of the shares for capital gains purposes because the shareholder loses beneficial ownership of the shares
  • a disposal of the DRs is not a disposal of the underlying shares
  • in a share exchange or company reconstruction in which shareholders have an option to receive DRs instead of being issued with shares the conditions of TCGA92/S135 will not be met by shareholders who take DRs as they have not been issued with shares

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© Crown Copyright 2012.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.



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Article Published/Sorted/Amended on Scopulus 2012-05-21 08:32:36 in Tax Articles

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