UK and International Tax news

Beneficial Ownership And Depositary Receipts

Monday 28th May 2012

HMRC has issued guidance in Brief 14/12 on its treatment for direct taxes purposes of beneficial ownership and depositary receipts following the recent FTT case involving SDRT and HSBC Holdings and Bank of New York Mellon v HMRC [ 2012/163].

The case involved examining 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.

The FTT concluded that beneficial ownership provided by the ADRs in the underlying shares was not retained and has raised concerns about HMRC’s treatment of ADRs and other types of DRs for the purposes of direct taxes, which 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.

HMRC has confirmed that as the FTT decision is not binding in relation to other cases for tax purposes, it will continue to treat ADRs as conferring beneficial ownership as according to its established interpretation of the principles of English law.

So, 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 HMRC accepts that the shares are to be treated for the purposes of s.135 TCGA92 as being issued to the shareholders.

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 and information on beneficial ownership may be provided to investors by the depositary.

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 apply its longstanding practice of regarding the holder of a DR as holding the beneficial interest in the underlying shares.

HMRC guidance will be amended shortly to reflect this clarification.

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