EU court backs HSBC over UK stamp duty challenge

The European Union's top court ruled on Thursday that a British tax on share transactions breaks EU law, leaving an already cash-strapped UK treasury potentially facing a refund bill running to billions of pounds.

Europe's biggest bank, HSBC argued in the European Court of Justice that when it bought French rival CCF in 2000, it had to pay a 1.5 percent UK stamp duty reserve tax on sharesit offered to CCF shareholders through a French clearing service.

The court said the duty contravened the EU's capital duty directive in a ruling that British firms that have been involved in a cross-border takeover will study carefully.

Neither HSBC nor the Treasury were able to comment immediately.

The directive "must be interpreted as meaning that it prohibits the levying of a duty such as that at issue in the main proceedings, on the issue of shares into a clearance service" the court said in its ruling. The case goes back to a British court where HSBC is expected to ask for a refund of the duty, with other companies in a similar situation expected to follow suit.

"It means a very significant exposure to the UK Treasury with potentially billions of pounds to be paid to UK companies who have paid the tax previously" said Mark Persoff, a partner specialising in financial law at Clifford Chance.

"The way we impose transaction taxes on share transactions will have to be completely rethought" Persoff said.

The ruling will not affect a separate stamp duty on share purchases within Britain.

The stamp duty reserve tax affects cross-border merger and acquisitions activity such as when a British company is offering shares through a foreign clearing company as part payment for the target company.

The ruling could also affect banks raising regulatory capital through preference shares or companies accessing the U.S. ADR market, Persoff said.