A recent decision of the Tax Appeals Commission (TAC) will be of interest to Pharma, Healthcare and MedTech companies that are considering M&A transactions in the Irish market.
In December 2020, Abbvie Plc (Appellant) successfully overturned a €572m assessment for stamp duty. The assessment arose out of the Appellant’s acquisition of Allergan Plc for €52bn. The acquisition was effected through a cancellation scheme that involved Allergan Plc cancelling its existing shares in a court-approved process and re-issuing new shares to a wholly-owned subsidiary of the Appellant. Following an amendment to the Stamp Duty Consolidation Act 1999 (SDCA 1999), the Revenue Commissioners (Revenue) held that the consideration for the re-issued shares was subject to stamp duty and that the Appellant was the accountable person.
New Stamp Duty Charge
The amendment to Irish stamp duty law was announced in the Budget Statement for 2020 and introduced by section 61 of Finance Act 2019. According to the Budget Statement, the amendment’s purpose was an anti-avoidance measure to protect the stamp duty base. The effect of the measure was that a 1% stamp duty charge would apply on cancellation schemes if used for the acquisition of a company. The new charge applies to transactions where the scheme order was made by a court on or after 9 October 2019. No transitional arrangements were put in place for cancellation schemes publicly announced before 9 October 2019 but where a court order approving the scheme had not yet been obtained i.e. this was the situation that Abbvie Plc found itself in.
Capital Taxes Directive 2008/7 (Directive)
The Appellant’s principal ground of appeal was based on Directive 2008/7, the Capital Taxes Directive, which prohibits the imposition of indirect taxes on a company’s capital. One of the main purposes of the Directive is to promote the free movement of capital within the EU by prohibiting capital duties and narrowing the scope for Member States to impose other indirect taxes that inhibit the movement of capital. The Directive’s stated objective is to phase out capital duties and indirect taxes within the EU.
Ireland is currently in breach of its obligations to transpose the Directive into national law. Revenue argued that as the Directive had not been transposed into national law it did not have direct effect. However, as the Directive’s predecessor, Directive 69/335, was found by the European Court of Justice to be directly effective, the TAC rejected this argument.
Revenue also argued that a cancellation scheme was a transaction that fell outside the scope of the Directive and that the Directive should only apply to transactions where both parties were situated in a Member State. Rejecting these arguments, the TAC held that a broad interpretation was required to give effect to the goals of the Directive. The TAC found that the cancellation scheme did come within the definition of “restructuring operations” under Article 4 of the Directive and that under Article 5 it could not be subject to stamp duty at any rate.
Doctrine of Conforming Interpretation
The leading decision on the doctrine of conforming interpretation is the Court of Justice’s judgement in Marleasing (C-106/89). Applying the doctrine, the TAC is obliged to interpret section 31D SDCA 1999 in light of the wording and purpose of the Directive. Where this is not possible, the TAC is obliged to disapply the domestic provision.
During the hearing, the Appellant put forward several suggestions of additional words that could be implied into section 31D SDCA 1999 so that the section could be read to conform with the Directive. The TAC approved the additional wording to section 31D(c) so that it read:
“the shareholders of the target company receive consideration for the cancellation of those shares held by them.”
The words in parenthesis are the words implied into section 31D(c) SDCA 1999 by the TAC. The implied words are inspired by Article 4(1)(b) of the Directive and are designed to ensure that certain cancellation schemes will be interpreted as falling within the definition of a “restructuring operation” under the Directive. The TAC’s interpretation means that in a cancellation scheme where the shareholders of the target company receive only cash, stamp duty will apply, but where the consideration consists even in part of shares, it will be a restructuring operation and stamp duty will not apply.
Revenue has appealed the TAC’s decision to the High Court on a point of law. For Revenue to succeed, they will have to reconcile section 31D SDCA 1999 with the Capital Taxes Directive and establish that a cancellation scheme is not a “restructuring operation”, necessitating a narrow interpretation of the Directive. However, the stated purpose of the Directive is to prohibit stamp duty on restructuring operations to help foster investment within the EU. Accordingly, it will be interesting to see whether the High Court will agree with the TAC’s approach and interpret the Directive’s provisions broadly.