Barrier 12
Transaction taxes collected via
local settlement systems
Barrier 12
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‘Any provision requiring that taxes on securities transactions be
collected via local (settlement) systems should be removed to
ensure a level playing field between domestic and foreign
investors.’
(Second report on EU clearing and settlement arrangements)
Rules that are targeted
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Tax regime whereby taxes on securities transactions are collected
via settlement systems do not constitute a barrier by definition
If taxes are to be collected via settlement systems, foreign
settlement service providers should also have the possibility to
collect such taxes under similar conditions
Rules that may constitute a barrier include:
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rules that do not allow the tax to be collected by operators of
foreign settlement providers
rules that allow taxes on securities transactions to be collected
via foreign settlement service providers but under less favorable
conditions (e.g. obligation to appoint fiscal representative,
different liability standards, ..)
Why do these rules constitute a barrier
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Foreign settlement service providers are not in a position to
compete with local settlement service providers;
Intermediaries and investors are obliged to link up with the local
settlement system that operates the tax collection functionality
The investor’s or intermediary’s choice of provider for securities
settlement services is limited
Examples of taxes collected via settlement
systems
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UK Stamp Duty Reserve Tax
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Irish Stamp Duties
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Belgian withholding tax on securities held in the so-called X/N
system
UK
Stamp duty reserve tax
UK Stamp Duty Reserve Tax
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Tax on agreements to transfer chargeable securities for money or
money’s worth (unless there is an instrument of transfer & stamp duty
is paid or an exemption invoked)
In principle a 0.5% charge applies
Chargeable securities: mainly equities, rights, warrants and certain
debt securities that are either issued by UK issuer or registered on a
register kept in the UK
What is the role of CREST?
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Crest is operator of a relevant system under the Uncertificated
Securities Regulations (SI 3755/2001)
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As an operator of a relevant system, CREST is required to
– ensure that chargeable transactions are reported to the IR
– collect SDRT and account for it to the IR
Transactions in other settlement systems
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Principle: 1,5% clearing service charge upon entry of the
securities into the settlement system & no duty on transfers
within the system
Possibility for settlement system (even if not established in the
UK) to enter into election with the IR
Consequences of such election:
– No clearing service charge upon entry of the securities into
the settlement system
– Application of the 0,5% charge upon the transfers within
the settlement system
Conditions for election
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IR may require the operator of the settlement system to make and
maintain satisfactory arrangements
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For collection of stamp duty reserve tax
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For complying or securing compliance with the stamp duty
regulations
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Similar to the arrangements in Crest
If the operator is not resident in the UK or has no branch or agency
in the UK, the IR may require the operator to appoint a tax
representative in the UK
Irish Stamp duty
Irish Stamp Duty
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1% charge on certain ‘instruments’, such as
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Instruments which effect transfers on sale of registered shares in
Irish companies or equitable interests in Irish shares
Contracts for the sale of equitable interests in Irish shares
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No equivalent of the UK SDRT
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Special provisions for transfers of Irish shares in CREST
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Operator instruction by an operator of a relevant system
deemed to be an executed instrument of transfer
What is the role of CREST?
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Crest is operator of a relevant system under the Uncertificated
Securities Regulations 1996 (Companies Act 1990)
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One of the conditions to become an operator: enter into an
agreement with the Irish Revenue Commissioners in relation to
payment of any stamp duty chargeable on transfers of title
through the relevant system
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The Irish stamp duty regulations (Stamp Duties Consolidation Act
1999) foresee that the IRC may enter into an agreement with an
operator in such form and on such terms and conditions as they
think fit
Transactions in other settlement systems
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No clearance service charge
Operator of settlement system considered to be accountable
person for securities that are transferred into the settlement
system
No clear stamp duty treatment for transactions that take place in
such settlement system
--->
question as to whether such transfer is (i) a transfer through a
relevant system of an equitable interest in securities and (ii) if so if
it is deemed to be effected by an operator instruction
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issue with respect to exemptions that are invoked on transfers
into the system (and that are conditional upon subsequent
transfers within the system)
Belgian X/N system
X/N system
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Pro-rata temporis withholding tax regime for debt securities held in
book entry form in a recognized settlement system
Currently only the settlement system operated by the Belgian
National Bank has been recognized
X/N system operated by BNB mainly -but not exclusively- used for
Belgian government debt securities
X/N system
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Main characteristics of the tax regime:
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Securities are held by accountholders with the operator of the
system in tax exempt accounts (X accounts) and taxable
accounts (N accounts)
Taxation pro-rata temporis:
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Any entry of securities into a taxable account results in a
credit of withholding tax on interest accrued since last
income payment date until date of entry
Any delivery out of a taxable account results in a debit of
withholding tax on interest accrued since last income
payment date untile date of delivery
Taxes are collected by the operator of the settlement system
X/N system: conditions for recognition
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Only BNB or credit institutions established in Belgium can
obtain recognition
Foreign settlement systems can hold securities in local
settlement system but transactions in the books of foreign
settlement system need to be mirrored in the books of the
local settlement system to ensure correct tax treatment of
transactions in taxable accounts