Court of Appeal Ruled Overseas Merger Exempt from Hong Kong Stamp Duty

The Court of Appeal recently handed down its judgment in Nomura Funds Ireland Plc v The Collector of Stamp Revenue [2021] HKCA 1040 and held that the vesting of Hong Kong stock in a merger by way of universal succession[1] does not give rise to stamp duty under Hong Kong law.  Prior to the judgment, the applicability of stamp duty in overseas mergers of companies holding Hong Kong stock was not statutorily codified.  The present case is the first time a judicial authority in Hong Kong has confirmed such a position.

  1. Background of the Case

The present case concerns a dispute arising from the merger of two funds in the Nomura group (the “Merger”).

Nomura Funds Ireland Plc, the appellant, is an investment company incorporated in Ireland, structured as an umbrella fund consisting of different sub-funds.  The appellant is authorised by the Central Bank of Ireland as an Undertaking for Collective Investment in Transferrable Securities (“UCITS”) pursuant to a directive published by the European Union.  Nomura Funds Ireland – China Fund (“Receiving Sub-Fund”) is one of the sub-funds of the appellant.

Nomura Funds (“Nomura Luxembourg”) was another investment company incorporated in Luxembourg , which was also a UCITS, with Nomura Funds – China Opportunities (“Merging Sub-Fund”) as its sole sub-fund. The assets in the Merging Sub-Fund consisted entirely of securities listed on the Hong Kong Stock Exchange (“HK Securities”).

The appellant and Nomura Luxembourg proposed to merge the Receiving Sub-Fund and the Merging Sub-Fund in accordance with the Luxembourg law relating to UCITS (“Luxembourg UCITS Law”) and based on the following draft key terms set out in a written instrument titled “Common Merger Proposal” (“CMP”):

  • the Merger would be made in accordance with the relevant articles of the Luxembourg UCITS Law;
  • on the effective date of the Merger, the Merging Sub-Fund would transfer all its assets and liabilities to the Receiving Sub-Fund as a contribution in specie, in exchange for shares in the Receiving Sub-Fund to be issued to the sole shareholder of the Merging Sub-Fund, namely, Samba Capital and Investment Management Company, a company incorporated in Saudi Arabia; and
  • the shares of the Merging Sub-Fund would be cancelled and Nomura Luxembourg would cease to exist.

According to Luxembourg UCITS Law, where the merging UCITS is established in Luxembourg, its merger with another UCITS is subject to the prior approval by the Luxembourg Commission for the Supervision of the Financial Sector (“CSSF”) which will determine if the draft CMP prepared by both parties to the merger meets the prescribed statutory conditions.

In March 2015, the CSSF notified Nomura Luxembourg that it had no objection to the Merger.  The Merger proceeded to take place in April 2015 and subsequently the assets of the Merging Sub-Fund, i.e. the HK Securities, were transferred to the Receiving Sub-Fund.  Nomura Luxembourg was later deregistered in May 2015.

  1. The Dispute in the Present Case

The HK Securities were Hong Kong stock within the meaning of Section 2 of the Stamp Duty Ordinance (Chapter 117 of the laws of Hong Kong) (“SDO”), and the transfer of any beneficial interest in Hong Kong stock is chargeable to stamp duty under Section 4 and Head 2(3) of the First Schedule to the SDO.  The substantive issue in dispute was whether the Merger constituted a “transfer” of beneficial interest in Hong Kong stock within the meaning of the SDO.

The appellant sought stamp duty relief from ad valorem stamp duty (“AVSD”) under Section 27(5) of the SDO with regards to the vesting of HK Securities on the grounds that (i) there was no “transfer”, but only “transmission” of the HK Securities, which was effected by operation of the Luxembourg UCITS Law, rather than by the CMP; and (ii) no beneficial interest in the HK Securities passed under the CMP as the vesting of HK Securities amounted to a “transmission” or “universal succession” under Luxembourg UCITS Law.  Therefore, the CMP should not be a “stampable” instrument under Head 2(3) of the First Schedule to the SDO.  The appellant’s view was supported by two Luxembourg legal opinions (“Luxembourg Legal Opinions”) and the same were submitted to the Collector of the Stamp Revenue (the “Collector”).

The Collector disagreed with the appellant and held that the CMP was chargeable to AVSD because (i) the Merger operated as a voluntary disposition inter vivos; and (ii) the CMP was made for the purpose of effecting a transaction whereby the beneficial interest in the HK Securities passed.

  1. The District Court Decision

The appellant appealed to the District Court, which upheld the Collector’s position on the grounds that (i) the CMP stated that the transfer of the assets and labilities to the Receiving Sub-Fund was to be done “in accordance with” (as contrast to “by operation of”) Luxembourg UCITS Law; (ii) the distinction between “transfer” (by voluntary acts) and “transmission” (by operation of law), if any, and in other contexts (e.g. companies law), is wholly irrelevant to the present case, and in particular, the Collector agreed that “transfer” for the purposes of Head 2(3) of the First Schedule to the SDO should be construed with its natural and ordinary meaning, i.e. “one parting with something to another”; and (iii) the Luxembourg Legal Opinions were inconsistent with each other and the second Legal Opinion lacked legal analysis and was not supported by the plain reading of the statutory provisions of the Luxembourg UCITS Law.  Hence, the CMP should be chargeable to stamp duty.

  1. The Court of Appeal Decision

The Court of Appeal overturned the District Court decision and ruled in favour of the appellant.  The Court of Appeal held that the CMP is not itself a stampable instrument and there was no change in beneficial ownership of the HK Securities.  The Court of Appeal set out in the judgment each of the grounds of appeal raised by the appellant, and in summary:

Grounds 1 & 2:  Did the District Court err in law by rejecting the Luxembourg Legal Opinions? Alternatively, did the District Court err in law by interpolating its own interpretation of Luxembourg UCITS Law?

The Court of Appeal was of the view that the Luxembourg Legal Opinions were not inconsistent with each other and that the District Court erred for not accepting the Opinions.  In fact, the Court of Appeal held that the Luxembourg lawyers provided clear and cogent reasons in support of their view that the vesting of the HK Securities in the Receiving Sub-Fund was effected through the operation of transmission by law but not by the CMP.

Ground 3: Did the District Court err in law by finding there was no material distinction to be drawn between a “transfer” and a “transmission” in the context of the charge to AVSD?

Given the reasoning set out above, the Court of Appeal found that it was not necessary to deal with this Ground 3.  Nevertheless, for the sake of completeness, the Court provided its view that the Merger met the essential criteria of a universal succession by law despite the word “transmission” not being mentioned in the relevant articles of the Luxembourg UCITS Law.  It was clear to the Court that the vesting of the HK Securities in the Receiving Sub-Fund was by way of universal succession and as such was not subject to stamp duty under the SDO.

Ground 4: If there had been a “transfer” of the HK Securities, would the said “transfer” be exempt under Section 27(5) of the SDO by virtue of being a transfer under which no beneficial interest passes? 

Given the above conclusions, the Court of Appeal found that it was unnecessary to consider this Ground.

  1. No interest on Refund of Stamp Duty

Another interesting point to note from the present case is that after the Court of Appeal ordered the Collector to refund the full amount of the stamp duty paid by the appellant, the appellant sought for interest on the refund of the duty paid at the rate of 8% per annum, accruing from the date of its payment to the Collector, based on (i) common law restitution that the Collector was unjustly enriched with the benefit and use of the paid stamp duty proceeds; and (ii) Section 49 of the District Court Ordinance (Chapter 336 of the laws of Hong Kong), pursuant to which the District Court may order simple interest on the debt or damages in respect of which a judgment is given by Court at the rate as it thinks fit.

The Court of Appeal rejected the appellant’s request and agreed with the Collector’s view that the appellant should not be entitled to interest on the refund as the statutory appeal regime under the SDO was not intended to award interest on any refunds for any payer of stamp duty who successfully challenged the Collector’s assessment on appeal.  In the present case, Section 14 of the SDO provided for the statutory regime under which a stamp duty payer can appeal against the Collector’s assessment.  The Court of Appeal was of the view that Section 14 of the SDO was intended by the legislature to provide an exhaustive appeal scheme setting forth the circumstances and terms under which payments of stamp duty wrongly assessed may be recovered.  The Court of Appeal noted that the legislature, as a matter of policy, had balanced the need to have the stamp duty paid to the public purse first despite an ongoing appeal with the prejudice that may be suffered by any payer of stamp duty in the event that it is successful in its appeal.  Accordingly, it could not be the intention of the legislature to allow for interest to be payable on any such recovered amounts.

  1. Key Takeaway

This case has set a legal precedent in Hong Kong on the stamp duty implications arising from an overseas merger.  The case also confirms that “transfers” of Hong Kong stock by way of universal succession (i.e. the surviving entity inherits all assets and liabilities of the absorbed entity by operation of law, such that upon merger, the former would be treated as good as the latter in law) should not give rise to any charge to stamp duty.  Although the underlying assets being “transferred” in the present case were Hong Kong stock, it is expected that the same principle will also apply to immovable properties situated in Hong Kong.

[1] The doctrine of universal succession originates from Roman law.  In brief, the doctrine of universal succession provides that where the law of incorporation recognises a succession of corporate personality from one corporate entity to another, then the law of the forum will recognise both the changed status of the company, and the fact that the successor will inherit all rights and liabilities of its predecessor.  Since the doctrine was not in dispute in the present case, we will not further examine it in this Bulletin.

11 September 2021
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