| Stamp duty changes on securities transactions |
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| The Finance Act heralded a fundamental and welcome change in the stamp duty regime governing securities transactions. This followed a useful process of consultation with industry prior to the introduction of legislation. |
Historical position
Until now, dealers in Irish securities had to avail of market maker, broker dealer or closings relief to avoid 1p.c. stamp duty on share transactions. All of these reliefs were cumbersome and entailed significant administrative burdens with broker dealer relief in particular requiring that securities traders track their holdings to ensure they are held for not more than one month. The meaning of several provisions of the existing legislation was unclear.
Last year, the Revenue issued a compliance notice, via a CREST operational bulletin, which broadly provided that market maker and broker dealer relief would be unavailable to dealers in their purchases of Irish equities for the purpose of hedging contracts for differences ('CFDs') or other Irish equities derivatives transactions. The effect would have been to make acquisitions of Irish shares undertaken to hedge CFDs subject to 1p.c. stamp duty which could have seriously damaged the market for CFDs in Irish shares. It could also have damaged the underlying Irish equities market, given that it is estimated that between 30 and 35p.c. of trades in Irish shares are undertaken to hedge CFDs. After industry raised its concerns regarding this matter, the notice was withdrawn and a review was undertaken.
New Regime
The result of the review has been the introduction of legislation along the lines of the corresponding UK legislation. This is a welcome development. This system, having been used by traders in UK securities for so long is well understood by the market and easy to implement. The changes have not taken effect with the passing of the Act but will take effect by Ministerial Order once a number of operational issues are finalised with CREST.
Going forward, a transfer of title to securities to an entity who carries on a bona fide business of dealing in securities (and/or entering into of derivative agreements referenced directly or indirectly to securities) will be exempt from stamp duty if the entity is a member of the Irish or London stock exchange or any other exchange or market designated and approved by the Revenue and is a recognised intermediary in relation to that exchange or market. It is also currently necessary that the transfer of the securities is effected on a designated exchange or market and the transfer is not effected in connection with 'an excluded business', as defined. An excluded business broadly consists of the making or managing of investments; the provision of services to connected persons; insurance or assurance business; administering, managing or acting as trustee in relation to pension business; operating or acting as trustee in relation to collective investment schemes.
It is a positive development that, unlike the UK, the legislation has made specific provision for an intermediary's business to include derivatives trading and has provided that the conduct of an excluded business should only result in the denial of relief in relation to that part of the intermediary's business which constitutes excluded business and not in relation to its entire business. These issues have been the subject of some interpretation in the UK with a great deal of reliance being placed upon Parliamentary statements at the time of the introduction of the legislation. It is very welcome therefore that the Irish legislation provides more clarity in this regard.
It is regrettable that the new legislation does not cater for stock loans. As lending and borrowing securities form an integral part of an intermediary's business in providing liquidity to the market, it would have been sensible to introduce a compatible relief along the lines of the UK relief, in place of the existing time-based relief which is unnecessarily cumbersome and restrictive.
The industry should beware of making a mistaken assumption that the Irish and UK rules are exactly the same. Fundamentally, Irish stamp duty, applying to the transfer of shares, is a different legal concept to UK stamp duty reserve tax which applies to agreements to transfer shares. This may have implications for the analysis of ancillary transactions. Specifically, the Irish legislation allows an intermediary to carry on excluded business but dis-applies the relief to any such excluded business, however small. The UK legislation prohibits the carrying on of excluded business by an intermediary. However, for UK purposes, an entity is only regarded as carrying on such business in relation to investments, investment management and the provision of services to connected persons where it carries on a business consisting wholly or mainly of these activities which can often be avoided. Any Irish and UK or other entities contemplating becoming an intermediary for Irish stamp duty purposes will need to review carefully whether some of their activity, however small, may become subject to stamp duty.
A largely procedural amendment was also made to put in place a new relief for transfers of securities to and from a central counterparty which is necessary for central clearing houses used to take orders from member firms of the stock exchange and provide anonymity as all trades are settled against the central counterparty. This is also a welcome development.
MiFID amendments required
Ireland and the UK are among the first four Member States of the EU to have fully transposed the Markets in Financial Instruments Directive ('MiFID'). The transposing regulations will take effect from November 1st, 2007. The MiFID harmonises and modernises the EU wide legislative framework for investment firms, promoting greater cross-border competition.
In the UK Finance Bill, the UK Revenue have amended the UK stamp duty legislation to allow firms to benefit from the introduction of the MiFID by making stamp duty relief available in more cases to intermediaries that trade in securities and to update for tax purposes the definition of a recognised stock exchange. From November 2007, where there is a transaction in UK shares on any regulated market under MiFID or on a multilateral trading facility, there will be no requirement for the transaction to be reported to the market or for the intermediary making the trade to be a member of the market in order for the transaction to benefit from UK stamp duty and stamp duty reserve tax relief.
Although the new Irish legislation is wide enough to encompass other exchanges and markets, it does not allude to multilateral trading facilities and still contains membership and reporting requirements in order to benefit from the relief. Industry would have preferred if the new legislation addressed these issues from the outset in line with the UK but it is hoped that the necessary changes will be made in the coming months.
In conclusion
It would have been opportune to consider the complete abolition of the 1p.c. stamp duty on Irish share transactions in the course of the review of its operation considering this would have merely brought Ireland in line with most of the other major financial centres, who do not impose any duty on most share transactions, with the exception of the UK (with a 0.5p.c. rate). Nonetheless, the introduction of some level of compatibility between the UK and Ireland, being the two major jurisdictions where Irish shares are traded is a very welcome development. |
Conor O’Brien is a tax partner at KPMG.
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| Article appeared in the April 2007 issue.
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