In a decision that will no doubt come as a great relief to the funds, banking, and asset management industries, the Court of Appeal ruled in Nomura Funds Plc v Collector of Stamp Revenue  HKCA 1040 that a merger effected by way of the universal succession of the merged company (i.e., the surviving company) to the assets and liabilities of the merging company (i.e., the absorbed company) does not give rise to a charge to stamp duty where the assets vested in the merged company include Hong Kong stock or immovable property situated in Hong Kong. In other words if, say, two offshore companies holding Hong Kong real estate were to merge, that transaction should have no stamp duty consequences in Hong Kong. This is the first time a decided authority in Hong Kong confirms this commercially important point, which had long been the working assumption in the financial sector in Hong Kong.
Deacons acted for Nomura Funds, the duty-payer, as both solicitors and advocates before the Court.
The dispute arose from the merger of two funds in the Nomura group (the Merger): the merging company was incorporated in Luxembourg (the Luxembourg Company), and the merged company, the appellant duty-payer, was incorporated in the Republic of Ireland. The Merger was effected pursuant to Council Directive 2009/65/EC (the Directive), which was, pursuant to European Union law, enacted in Luxembourg under the Law of 17 December 2010 on undertakings for collective investment in transferable securities (the Luxembourg Law). The Luxembourg Company held a portfolio of securities listed on the Hong Kong Stock Exchange (the HK Securities). On the effective date of the Merger, the Luxembourg Law stipulated that the Luxembourg Company would be dissolved without going into liquidation, and that its assets and liabilities would be transferred to Nomura Funds. The HK Securities were at all material times Hong Kong stock within the meaning of s.2 of the Stamp Duty Ordinance (SDO). The transfer of beneficial interest in Hong Kong stock is chargeable to stamp duty under s.4 and Head 2(3) of the First Schedule of the SDO. The relevant question, therefore, was whether the Merger was a ‘transfer’ of beneficial interest in Hong Kong stock within the meaning of the SDO, or otherwise exempt from duty by virtue of not being a ‘transfer’ as understood in the legislation.
Nomura Funds initially approached the Stamp Office seeking adjudication under s.13 of the SDO that the Merger was not dutiable on the basis that the vesting of the HK Securities in Nomura Funds pursuant to the Merger took place by operation of the Luxembourg Law, and was not, therefore, a voluntary transfer in the technical sense of the term. In support of that contention, Nomura Funds produced two opinions of Luxembourg counsel that confirmed the position that the vesting of the property of a merging company in the merged company pursuant to the Luxembourg Law had no voluntary element, but took place by operation of that piece of legislation. The Stamp Office disagreed, and assessed the Common Merger Proposal (CMP), the document that set out the terms of the Merger, to stamp duty under Head 2(3). Nomura Funds appealed that assessment to the District Court.
The District Court decision below
The District Court agreed with the Collector of Stamp Revenue (the Collector) that the CMP was a dutiable instrument, and dismissed the appeal of Nomura Funds. In summary, the Court did so on the basis of two conclusions. First, it held that there was no meaningful distinction between a transfer (that is, a voluntary disposition such as a gift or a sale) on the one hand and, on the other, a transmission (that is, a transfer by operation of law, such as the vesting of the property of a person deceased in his estate) in the context of the SDO, albeit that distinction is well-established at corporate law. Second, it concluded that the opinions of Luxembourg law were manifestly wrong and contradictory and, instead, substituted its own preferred reading of the Luxembourg Law, stating that the word ‘transfer’ as found in the Luxembourg Law in relation to the property of merging company meant the same thing as a ‘transfer’ in the context of the SDO.
The Court of Appeal’s decision
Nomura Funds appealed, and the Court of Appeal allowed the appeal orally on 14 January 2021, and subsequently handed down its reasons on 21 July 2021. In finding for the duty-payer, the Court disagreed with both conclusions of the District Court below. First, it implicitly accepted that there was a fundamental distinction in the context of the SDO between a transfer and a transmission and that point was, in effect, conceded by the Collector. Only a transfer of Hong Kong stock gives rise to a charge to stamp duty; conversely, a vesting of Hong Kong stock by operation of law (i.e., a transmission) is not dutiable because it falls outside the terms of the relevant charging provision in the SDO. Turning to the question of the evidence of Luxembourg law before it, the Court concluded that the District Court had erred in declining to accept the conclusions set out in the opinions of Luxembourg counsel. The opinions were apparently well-reasoned, not manifestly wrong, and internally consistent. On that footing, there was no basis for the District Court below to reject them, and, by extension, to substitute its own views of Luxembourg law for those of Luxembourg counsel.
The question of interest
In ordering the Collector to refund the stamp duty he had assessed on Nomura Funds, there arose the question of whether the Court had jurisdiction to award interest in view of the fact that the Collector had held stamp duty charged and not due for approximately five years. In declining to award interest, the Court indicated that it would not follow a line of English precedents for the proposition that in the absence of express statutory provisions to the contrary, an appellant taxpayer had a restitutionary right to interest on tax paid, but not due. The Court’s reasons for declining to award interest were, in our view, unsatisfactory. It is nevertheless of some assistance to duty-payers that it is implicit in the Court’s decision that an appellant may legitimately expect the Collector to act promptly in all matters relating to a stamp duty appeal – especially if he holds the duty-payer’s money by way of stamp duty he has assessed – and that the duty-payer may seek interlocutory reliefs if the Collector does fail to act promptly.
Impact of the Court of Appeal’s decision
It should now be settled that a merger that takes place by universal succession (i.e., where the merged company succeeds to the assets and liabilities of the merging company), as distinct from mergers that are in reality mere asset contributions, does not give rise to any charge to stamp duty. We would expect the Stamp Office to accept that it is bound to follow that general proposition, though it may reserve the right to request an opinion of foreign law confirming that the relevant merger was a ‘true’ merger by way of universal succession.
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