Court of Justice of the European Communities (including Court of First Instance Decisions)

OPINION OF ADVOCATE GENERAL

MENGOZZI

delivered on 18 March 2009 (1)

Case C-569/07

HSBC Holdings plc

Vidacos Nominees Ltd

v

The Commissioners of Her Majesty's Revenue & Customs

(Request for a preliminary ruling from the Special Commissioners, London)

(Indirect taxation Raising of capital Levying of a duty of 1.5% on the transfer of shares into a clearance service)

1. Clearance services play a role which may be defined as the holding of shares. In particular, they keep a record of the owners of the shares, and of transfers of shares, although, at all times, the bearer certificates are held by the clearance service concerned. In other words, clearance services make the acquisition and disposal of shares simpler, quicker and more secure.
2. Clearance services are widespread in continental Europe but not in the United Kingdom, where the arrangements for the transfer of shares have traditionally been different. Consequently, for certain transactions effected through clearance services, the United Kingdom applies a tax regime which differs from that applied to share transfers carried out under the usual arrangements within its territory. The present proceedings, deriving from a reference to the Court by the Special Commissioners, London, provide an opportunity to assess the compatibility of that tax regime with Community law.
3. More specifically, it will be necessary to examine the United Kingdom legislation in the light both of Directive 69/335, concerning indirect taxes on the raising of capital, and of the Treaty provisions on the fundamental freedoms.

I Legislative background

A Community law

4. Directive 69/335 (2) (or 'the Directive'), which is the main act of secondary legislation of relevance to the present case, has been extensively amended over the course of time.
5. The aims pursued by the Directive are clearly set out in the recitals in its preamble, in particular the first and second, which are worded as follows:

'... the objective of the Treaty is to create an economic union whose characteristics are similar to those of a domestic market and ... one of the essential conditions for achieving this is the promotion of the free movement of capital;

... the indirect taxes on the raising of capital, in force in the Member States at the present time, namely the duty chargeable on contribution of capital to companies and firms and the stamp duty on securities, give rise to discrimination, double taxation and disparities which interfere with the free movement of capital and which, consequently, must be eliminated by harmonisation'.

6. In the memorandum which, on 14 December 1964, accompanied the Commission proposal to the Council which was to become Directive 69/335, (3) the Commission observed that the total abolition both of capital duty and of stamp duties would be the best way of attaining a free capital market. However, faced with the fact that the Member States would probably oppose such a drastic measure, the Commission chose to do away with stamp duty and to leave in place a capital duty, albeit harmonised at Community level.
7. Over time, a series of amendments to the Directive have removed the obligation originally laid down to charge capital duty at a harmonised rate: in particular, Article 7 of the Directive, in its current version, provides that the Member States may either apply a rate not exceeding 1% or, quite simply, no longer charge capital duty. The United Kingdom abolished capital duty in 1988.
8. Article 4 of the Directive identifies the transactions that are chargeable to capital duty, specifying, among other things, '(c) an increase in the capital of a capital company by contribution of assets of any kind'.
9. As well as regulating the method of calculation and collection of capital duty, the Directive sets out a number of prohibitions designed to prevent both double taxation of contributions and the application of stamp duty. In particular, Articles 10 and 11 of the Directive provide as follows:

'Article 10

Apart from capital duty, Member States shall not charge, with regard to companies, firms, associations or legal persons operating for profit, any taxes whatsoever:

(a) in respect of the transactions referred to in Article 4;

(b) in respect of contributions, loans or the provision of services, occurring as part of the transactions referred to in Article 4;

...

Article 11

Member States shall not subject to any form of taxation whatsoever:

(a) the creation, issue, admission to quotation on a stock exchange, making available on the market or dealing in stocks, shares or other securities of the same type, or of the certificates representing such securities, by whomsoever issued;

...'

10. Notwithstanding the prohibitions just referred to, Article 12 of the Directive allows the Member States to levy certain specific taxes, providing as follows:

'Article 12

1. Notwithstanding Articles 10 and 11, Member States may charge:

(a) duties on the transfer of securities, whether charged at a flat rate or not;

...'.

B National law

11. The United Kingdom tax rules which must be examined here are set out in the Finance Act 1986 ('the Act'). Under section 87, transfers of shares are subject to a 'Stamp Duty Reserve Tax' (SDRT) of 0.5%, which is payable on every transfer.
12. Under section 96 of the Act, however, the entry of shares into a clearance service gives rise to a charge to SDRT of 1.5%. On the other hand, subsequent transfers of shares, so long as they occur within the same clearance service, are not taxed at all.
13. Finally, section 97A of the Act provides that a clearance service may elect to enter into an agreement with the Inland Revenue. If it does so, payment of SDRT is made at the standard rate of 0.5% instead of in the form of a one-off payment at the rate of 1.5%. Naturally, the tax is then payable on each individual share transfer. In order to be able to make the election, a clearance service is required to have a subsidiary or agency in the United Kingdom or, alternatively, to appoint its own 'tax representative' in the United Kingdom. The clearance service must also comply with a number of technical requirements relating to the arrangements for calculating and collecting the SDRT, and the related bookkeeping.

II Facts, the main proceedings and the question referred to the Court

14. HSBC is a bank in the form of a public limited company whose seat is in London. In June 2000, HSBC made a public offer to acquire all the issued shares of the French bank, Crédit Commercial de France ('CCF'), the shares of which were listed on the Paris Stock Exchange. In its offer, HSBC offered the shareholders of CCF, in exchange for their shares, a payment in cash or, alternatively, a payment in the form of HSBC shares. To make that second possibility more attractive to shareholders operating on the French market, HSBC decided to arrange for its own shares to be traded on the Paris Stock Exchange.
15. At the material time, in order to qualify for listing on the Paris Stock Exchange, a company was required to use Sicovam, a clearance service. Consequently, CCF shareholders who wished to accept HSBC's public purchase offer could choose to receive shares in HSBC directly through Sicovam; in that way, those shares could then have been sold on the Paris Stock Exchange.
16. In actual fact, the HSBC shares transferred through Sicovam in exchange for CCF shares were entrusted not directly to Sicovam but to its agent for the United Kingdom, Vidacos. That company is also a member of the CREST system; (4) however, since in the present case Vidacos acted as agent for Sicovam, the HSBC shares transferred through Vidacos (and Sicovam) were taxed, in accordance with section 96 of the Act, at a rate of 1.5%.
17. In order to make its public purchase offer more attractive to CCF shareholders, HSBC gave a commitment to pay the tax (SDRT) of 1.5% for any CCF shareholders who opted to receive HSBC shares through Sicovam. That was the universal practice, even though, under the national rules, the obligation to pay the tax technically falls on the clearance service.
18. As a result, HSBC paid the United Kingdom tax authorities over GBP 27 million in July 2000 by way of SDRT at the rate of 1.5%.
19. Subsequently, a charge to SDRT of 1.5% was also paid in respect of the HSBC shares obtained by shareholders holding shares through Sicovam who decided to receive their dividends in the form of shares.
20. By letter of 18 October 2002, however, HSBC asked the United Kingdom tax authority to refund the tax paid. The Inland Revenue's refusal was then challenged before the referring court, which, entertaining doubts as to the compatibility of the SDRT rules with Community law, referred the following question to the Court for a preliminary ruling:

'Does Article 10 or Article 11 of Council Directive 69/335, as amended by Council Directive 85/303/EEC of 10 June 1985, or Article 43, Article 49 or Article 56 of the EC Treaty or any other provision of European Community law prohibit the levying by one Member State ('the first Member State') of a duty on the transfer or issue of shares into a clearance service of 1.5% when:

(i) a company ('Company A') established in the first Member State offers to acquire the listed and traded shares in a company ('Company B') established in another Member State ('the second Member State') in return for shares in Company A, to be issued on the stock exchange in the second Member State;

(ii) shareholders in Company B have the option to receive the new shares in Company A either:

(a) in certificated form; or

(b) in uncertificated form through a settlement system in the first Member State; or

(c) in uncertificated form through a clearance service in the second Member State;

(iii) the law of the first Member State provides, in summary, that:

(a) in the event of the issue of shares in certificated form (or in uncertificated form in the settlement system for dematerialised shares of the first Member State), duty shall not be charged on the issue of the shares but on each subsequent sale of the shares, which duty is charged at the rate of 0.5% of the consideration for the transfer; but

(b) on the transfer or issue of uncertificated shares to the operator of a clearance service, duty shall be charged (where the shares are issued) at the rate of 1.5% of the issue price or (where the shares are transferred for consideration) at the rate of 1.5% of the amount or value of the consideration or, (in any other case) at the rate of 1.5% of the value of the shares and, no subsequent charge is thereafter levied on sales of the shares (or of rights to or over the shares) within the clearance service.

(c) the operator of a clearance service may, where it receives the approval of the relevant taxation authority, elect that no duty is charged on the transfer or issue of the shares to its clearance service, but that duty is instead charged on each sale of the shares within the clearance service, at the rate of 0.5% of the consideration. The relevant taxation authority may (and presently does) require, as a condition for its approval of such an election, that the operator of the clearance system seeking to make such an election should make and maintain arrangements (as the taxation authority considers satisfactory) for the collection of the duty within the clearance service and for complying or securing compliance with the regulations in relation to it.

(iv) the arrangements in force at the stock exchange in the second Member State require that all shares issued in that jurisdiction must be held in uncertificated form through a single clearance service established in the second Member State, the operator of which has not made the election referred to above?'

III The question referred to the Court

A Preliminary observations

21. The compatibility with Community law of the 1.5% SDRT must be assessed as has been pointed out, moreover, by the referring court in its question from two standpoints. First, it is necessary to determine whether that tax is permissible in the light of Directive 69/335 and, in particular, in the light of Articles 10 and 11 thereof. Second, it is also necessary to determine whether the tax in question can be reconciled with the fundamental freedoms provided for in the Treaty with respect to establishment, provision of services and movement of capital. For reasons of clarity, I shall examine the two aspects of the problem separately.
22. However, a fact which to my mind seems worth noting at this stage is that all the parties agree that the tax in question is not a capital duty within the meaning of Article 4 of Directive 69/335. Capital duty, as we have seen, was abolished by the United Kingdom in 1988.
23. Furthermore, as was also confirmed at the hearing, it must be borne in mind that the HSBC shares that were transferred to Sicovam in order to be assigned as payment for the CCF shares were new shares, corresponding to an increase of capital.

B Compatibility with Directive 69/335

24. The provisions of Directive 69/335 which may raise problems in relation to the tax in question are Articles 10 and 11. Those provisions, which have remained unchanged since the first version of the Directive, were drafted principally in order to prevent the Member States from introducing stamp duty in addition to capital duty, or imposing double taxation on capital contributions.
25. In particular, Article 10 provides that only capital duty to the exclusion therefore of any other tax may be levied on the transactions listed in Article 4 of the Directive, which, as we have seen, include 'an increase in the capital of a capital company by contribution of assets of any kind'.
26. Moreover, under Article 11 of the Directive, no tax (and that includes capital duty) may be charged on certain transactions, which include in particular 'the creation, issue, admission to quotation on a stock exchange, making available on the market or dealing in stocks, shares ...'.
27. Thus, for example, where new shares are issued, the issue as such may not, pursuant to Article 11, be taxed, whereas sums paid by way of consideration for the shares that is to say, the contributions may be subject to capital duty, if the legislation of the Member State in question so provides (Article 4), but not to other taxes (Article 10).
28. However, Article 12 provides that '[n]otwithstanding Articles 10 and 11', Member States may charge, inter alia, 'duties on the transfer of securities'. (5)
29. In the present case, the referring court perceives a possible conflict between the United Kingdom legislation and both Article 10 and Article 11 of the Directive. It seems to me, however, that, although both those provisions may be relevant here, it is more appropriate to focus on Article 11, since the conceptual framework of the SDRT shows that it is linked not to contributions but, more generally, to transactions belonging to the group defined in Article 11(a) (in particular, in the present case, the issue of shares as will be seen). Moreover, the SDRT applies regardless of whether or not the shares on which it is levied are newly issued.
30. The United Kingdom Government, which on this specific aspect is supported by the Commission, maintains that the 1.5% SDRT may be justified as a tax which applies to transfers of shares, within the meaning of Article 12 of the Directive: it is therefore permissible on the basis of the same provision as the one that authorises the 0.5% SDRT on transfers that do not go through a clearance service.
31. The differences between the 1.5% SDRT and the 0.5% SDRT are, however, considerable. Even more than the difference in the rate, what distinguishes them is the fact that, whereas the 0.5% SDRT is levied on every individual transfer of securities, the 1.5% charge is payable when the securities enter the clearance service while, so long as the securities remain within the clearance service, subsequent transfers of ownership of the shares are tax exempt.
32. In order to bring the 1.5% SDRT within the model of 'duties on the transfer of securities' within the meaning of Article 12 of the Directive, the United Kingdom contends that the 1.5% SDRT is a tax on transfers in the form of a 'season ticket'. Since it is problematical for the United Kingdom tax authorities to trace the transfers of shares once they are within a clearance service, a flat-rate tax of 1.5% calculated on the basis of the presumption that there will be three transfers of the securities within the clearance service, represents in its view an appropriate compromise. In other words, the 1.5% SDRT is simply a tax collected in anticipation of future transfers of shares. The United Kingdom also observes that it is open to clearance services to make the election provided for in section 97A of the Act, thereby activating the 'normal' mechanism of a charge to SDRT of 0.5% on each transaction.
33. The position taken by the United Kingdom does not seem to me to be acceptable, for the following reasons.
34. First, the 1.5% SDRT must be paid by one person only, who, in practice, is the issuer and/or transferor of the shares, although technically the person liable to the tax is the clearance service itself. Thus, in the present case, the tax was paid in full by HSBC. In contrast, under the 'normal' SDRT system, the tax is paid, upon each transfer of securities, by a different person, namely such person as may from time to time sell the shares. In other words, where shares are transferred to a clearance service, only one person is obliged to pay (at the rate of 1.5%) a tax which, under the 'normal' system, is, in contrast, paid by various persons in turn, each of whom pays 0.5%.
35. Secondly, the 'special' 1.5% SDRT payable when the shares enter the clearance service is calculated and then paid on the basis of the value of the shares at the time when they enter the system, and this remains the position even where the shares are later transferred on the basis of a higher or lower value, whilst remaining within the clearance service. It is clear, on the other hand, that in the case of SDRT levied on each individual transaction, the tax is based on the value of the security at the time when it is transferred.
36. Thirdly, it is not clear for what reason the rate of the SDRT payable when the shares enter a clearance service should be 1.5%, or triple the rate payable under the 'normal' system in respect of each transfer of securities. The United Kingdom maintains that the rate was determined on the premiss that, on average, the shares would be transferred three times once they were within a clearance service. No indication is given, however, of the factors underlying the calculation or of the reasons for which a rate of 1.5% appeared more appropriate than, for example, a rate of 1% or 2%. That is particularly noteworthy because, according to the order for reference, more than 40% of the HSBC shares transferred to Sicovam were withdrawn from it within two weeks in order to be sold on the London Stock Exchange, consequently attracting a further charge to SDRT of 0.5% on each transaction. In other words, setting the SDRT at 1.5% appears to be somewhat arbitrary. (6)
37. Finally, it should also be observed that, where the transfers subsequent to the first transfer of securities take place outside the United Kingdom which is likely, considering that those securities were probably placed in a clearance service in order to facilitate their circulation abroad the 1.5% SDRT would represent an advance on taxes payable on transfers in respect of which the United Kingdom's tax jurisdiction is by no means certain.
38. The foregoing observations are, it seems to me, sufficient to rule out the possibility that the 1.5% SDRT can be categorised as an 'advance' payment of tax on future transfers of securities. Indeed, even if we disregard the question of the rate of the tax, the fact remains that it is not possible to treat as an advance payment of a levy the payment of a sum calculated on a different tax basis and, above all, payable by a different taxable person. And it is well known that, according to settled case-law of the Court of Justice, the nature of a levy must be determined under Community law according to the objective characteristics by which it is levied, irrespective of its classification under national law. (7)
39. In any event, whenever the entry of shares into a clearance service constitutes the first trade in those shares after their issue, as in the present case, it must be observed that, in order to levy a tax that is justifiable under Article 12 of the Directive without falling foul of the prohibition laid down in Article 11 thereof it is necessary to treat as separate, from a legal point of view, the issue of the shares (which, under Article 11 of the Directive, is not taxable), on the one hand, and the first transfer of those shares, on the other. That first transfer, which is here the entry of the shares into the clearance service, may therefore be taxable on the basis of Article 12 of the Directive.
40. However, whilst it is possible in the abstract to separate the issue of shares from the first transfer of those shares, the Court of Justice has expressly ruled out that approach in its judgment in Commission v Belgium. (8) In particular, in paragraph 33 of that judgment, the Court held that '[f]or Article 11(a) of Directive 69/335 to have practical effect, therefore, 'issue', for the purposes of that provision must include the first acquisition of securities immediately consequent upon their issue'. In fact, as was observed by Advocate General Tizzano in his Opinion, (9) and repeated by the Court in paragraph 32 of the judgment, 'to permit the levying of tax or duty on the initial acquisition of a newly issued security amounts in reality to taxing the very issue of that security as it forms an integral part of an overall transaction with regard to the raising of capital. The issue of securities is not an end in itself, and has no point until those securities find investors.'
41. Moreover, the Court has clearly upheld the need to construe Article 12 of the Directive narrowly, in so far as it is a provision which derogates from a general rule, (10) and also confirmed that the list of exceptions laid down in that provision is exhaustive. (11)
42. Accordingly, I take the view that the 1.5% SDRT, when levied on the first transfer of newly issued shares, cannot be regarded as a tax on transfers within the meaning of Article 12 of the Directive and that it is therefore a tax on the issue of shares, prohibited under Article 11 of the Directive.
43. Nor do I consider it necessary, in the present case, to dwell upon the question whether Article 12 of the Directive is a derogating provision or, on the other hand, a limiting provision which demarcates the scope of the situations contemplated in Articles 10 and 11 of the Directive: that aspect, although interesting and perhaps in need of clarification, is not in fact relevant here. (12)
44. Likewise unacceptable is the argument which the United Kingdom appears to put forward in the alternative, should the Court consider the above case-law from Commission v Belgium to apply to the present case that the 1.5% SDRT would then have to be construed as an advance on the tax payable on future transfers, carried out after the first entry of the shares into the clearance service. In the first place, that construction seems wholly artificial, since the tax is clearly collected in respect of the entry of the shares into the clearance service. In the second place, a situation of that kind would exacerbate the problems I mentioned earlier and thus, in particular, would ultimately cause a tax calculated on the basis of three putative transactions to be paid by a person who, in those circumstances, would not even be a party to the first of those three transactions.
45. Moreover, even where the shares entering the clearance service are not newly issued, it seems to me that the justification for the 1.5% SDRT on the basis of Article 12 of the Directive would be difficult to accept. Indeed, quite apart from the prohibition on taxing the first transfer of the shares following their issue a prohibition which, in those circumstances, would not apply the objections that I have set out above regarding the difficulty of accepting the 'season ticket' approach would remain valid. In those circumstances, too, one person would be called on to pay a tax which, in principle (in other words, under the 'normal' system), would be chargeable to other persons, vis-à -vis whom the first person has no right of recovery. Moreover, even in such circumstances, the tax would be calculated on the basis of a value which might differ considerably from the actual value of the shares at a later stage, when the tax would normally be payable. In other words, here too it seems impossible to accept that the tax should be construed as a flat-rate payment by way of advance on the tax payable on future transfers.
46. The only difference, as compared with the case of newly issued shares, would lie in the fact that under the 'normal' SDRT system, tax of 0.5% would be payable in the case of existing shares. As we have seen, however, the 'normal' SDRT is not payable on the first issue of shares: consequently, for existing shares, the tax would in fact be heavier by 1%, not by 1.5%.
47. The only doubt that could arise with regard to the transfer of existing shares would concern the applicability to such a transaction, in principle, of the prohibition of taxation laid down in Article 11 of the Directive, in so far as that provision forbids the taxation of 'the creation, issue, admission to quotation on a stock exchange, making available on the market or dealing in ... securities'. However, it seems to me that a clear indication that it does indeed apply is to be found in the case-law of the Court. (13)
48. I would therefore conclude this part of my analysis with the affirmation that, in my view, the 1.5% SDRT mechanism cannot be regarded as compatible with Directive 69/335. That is especially true where the entry of the shares into the clearance service takes place immediately after their issue, as occurred in the present case; however, as we have seen, I consider that the basic reasoning applies also to the transfer of existing shares. In fact, in no circumstances can the 1.5% SDRT be regarded as an advance payment of tax on future transfers in accordance with Article 12 of the Directive.
49. The foregoing considerations are sufficient to settle the issues raised by the national court. However, for the sake of completeness and, in particular, in case the Court does not agree with my interpretation of the Directive I shall briefly examine the question in the light of primary legislation.

C Compatibility with the fundamental freedoms

50. It is now necessary, therefore, to determine whether a tax on transfers of shares, in principle permissible under Article 12 of the Directive, may legitimately be levied in different ways as in the case of the SDRT depending on whether or not the transferee is a clearance service. (14) In particular, it is necessary to consider whether the objective difference between a 'normal' transaction and a transaction consisting in the entry of shares into a clearance service is such as to justify the differences provided for under the United Kingdom system, such as the 'one'off' payment at a higher rate and the charging to a single person of all the tax payable. Lastly, it will be necessary to determine whether, in any event, the possibility open to clearance services of making the election provided for in section 97A of the Act is nevertheless sufficient to remove any doubts as to compatibility with Community law.

1. Compatibility with the rules of the Treaty

51. In the context of the present case, the parties have discussed the possibility that problems regarding the compatibility of the national legislation at issue with Community law might arise in relation to three different provisions of primary law: Article 43 EC, on freedom of establishment; Article 49 EC, on freedom to provide services; and, lastly, Article 56 EC, on the free movement of capital.
52. As regards freedom of establishment, HSBC maintains that the public offer to purchase CCF shares represented a manifestation, by HSBC, of its wish to establish a permanent seat in France: consequently, application of the 1.5% SDRT constitutes a restriction of that fundamental right.
53. As regards, on the other hand, freedom to provide services, the right of Sicovam to provide its services within the territory of the United Kingdom is, it submits, unjustly limited by the United Kingdom tax legislation.
54. With regard, lastly, to the free movement of capital, HSBC maintains that the United Kingdom tax rules infringe the relevant Treaty provisions in so far as those rules amount to a restriction of access to the Paris Stock Exchange, for which purpose it was necessary to go through Sicovam.
55. I would observe, first of all, that, in my view, the provisions on freedom to provide services are not relevant here. It should be borne in mind that, as observed above, the 1.5% SDRT is in fact paid not by the clearance service although it is technically the person liable to pay the tax but by the person who places the shares with the clearance service (in this case, HSBC). As a consequence, the only way in which the interests of the providers of services, namely the clearance services, are affected in practice by the tax in question is wholly indirect. Moreover, the fact that Sicovam has a permanent point of contact in the United Kingdom, namely Vidacos, seems to link the situation on which the national court must give a decision not so much to freedom to provide services as to freedom of establishment. (15) It may also be observed, in passing, that in the first recital in the preamble to Directive 69/335, the only fundamental freedom to which express reference is made is the free movement of capital.
56. I therefore consider that the examination of the SDRT in the light of primary law must be carried out by reference solely to freedom of establishment and the free movement of capital. The Court has already had occasion to examine the compatibility of provisions of national law with both of those freedoms, considered together. (16)
57. It is true that, according to the case-law, the acquisition of shares in a company whose seat is in another Member State, with the consequent guarantee that the acquirers will have a definite influence over the decisions and management of the company, may fall within the scope of the Treaty provisions on freedom of establishment. (17) In the present case, however, any restriction on freedom of establishment would be a direct consequence of obstacles placed in the way of the free movement of capital. Consequently, it is necessary first of all to examine the matter of restrictions on the free movement of capital: if it were to be found that there is an incompatibility with that fundamental freedom, it would not even be necessary to consider the matter of freedom of establishment. (18)
58. There is no doubt that the financial transactions at issue in the main proceedings fall, in general, within the scope of the free movement of capital. As we know, the Treaty does not define movement of capital, but the Court has often relied for guidance on the nomenclature annexed to Directive 88/361, (19) which indisputably covers activities linked to share dealing.
59. It appears undeniable that the United Kingdom rules at issue and specifically the application of a 1.5% SDRT when shares are placed with a clearance service constitute a restriction on the free movement of capital which is, in principle, caught by the prohibition in Article 56 EC.
60. First, the Court has made it clear that where national legislation discourages investments from other Member States, that fact alone brings it into conflict with Article 56 EC, and there is no need to consider whether the legislation in question is discriminatory. (20) Moreover, it has also been clearly established that the restrictions that are prohibited are not only those which are liable to discourage non-residents from making investments in a Member State, but also those which may discourage residents of a Member State from doing so in other States. (21)
61. Given the fact, clearly indicated in the order for reference, that clearance services are almost unknown in the United Kingdom, but fairly widespread in continental Europe, where in some cases they have a genuine monopoly over stock exchange transactions, there is no doubt that the United Kingdom rules in question could well discourage the free movement of capital.

2. Possible justifications for the restriction

62. Now that it has been established that the provisions of national law at issue are caught by the prohibition under Article 56 EC on restricting the free movement of capital, it is necessary to determine whether those provisions may nevertheless be justified, in particular in the light of Article 58 EC. On that point, regard must be had to the consistent dicta of the Court according to which, in order to be justified, national legislation must be appropriate for the achievement of the objective pursued but must not go beyond what is necessary to achieve that objective, in accordance with the principle of proportionality. (22)
63. The question of possible justifications for the restrictions imposed by the United Kingdom legislation has, however, been the subject of extremely limited discussion in the present case. In fact, leaving aside the United Kingdom's statement that the 1.5% SDRT is justified by the need to ensure effective fiscal supervision, the parties have concentrated essentially on the features of the election which a clearance service may make under section 97A of the Act.
64. It must be observed, however, that, in itself, the fact that it is possible to make that election has nothing to do with the justifiability or otherwise of the restriction on the free movement of capital. Logically, what we must ask ourselves with regard to that election is whether its existence may if its terms are in conformity with Community law neutralise the possible illegality of the national legislation in the light of Article 56 EC: in any event, however, that question must be kept separate from that of possible justifications for the restriction of free movement of capital. I shall deal with the election provided for in section 97A in the last part of this Opinion.
65. The United Kingdom maintains that the special tax regime for cases where shares are placed with a clearance service is justified by the need to ensure effective fiscal supervision.
66. To my mind, that justification cannot be accepted. In the first place, the United Kingdom does not state the reasons why it considers such a drastic measure to be the only way of ensuring the effective payment of taxes due, or why no other less onerous mechanism is considered capable of achieving the same objectives.
67. In the second place, however, irrespective of the availability or otherwise of less restrictive systems to ensure the payment of taxes, it seems to me that the observations I made above when analysing the question of compatibility with Directive 69/335 may also be made in relation to the fact that, by its very nature, the 1.5% SDRT cannot be regarded as an advance on the tax payable on future transfers of share ownership. That is so in particular because the tax in question is one which must be paid by someone other than the persons required to pay the 'normal' tax on transfers; but also the other problems noted above are relevant here. (23) In other words, the requirement of ensuring fiscal supervision does not justify compelling a person to pay the tax when that person is not the person who would normally be liable.
68. I therefore consider that the 1.5% SDRT also falls foul of Article 56 EC.

3. Does the right of election rule out the existence of discrimination?

69. The last question which must be considered, at this stage, is whether the existence of the possibility of an election, in accordance with section 97A of the Act, makes it possible to 'neutralise' the conflict between the 1.5% SDRT, on the one hand, and Directive 69/335 and the Treaty, on the other. In other words, more generally, we must ask whether, in the presence of legislation which conflicts with Community law, the possibility of making an election that renders a different set of rules applicable, which are presumed to comply with Community law, generally cancels out any illegality.
70. The parties devoted a considerable part of their observations, both oral and written, to discussing the election. In particular, both HSBC and the Commission consider that the conditions laid down by the United Kingdom legislation for making the election are excessively and inappropriately burdensome, and therefore disproportionate. The United Kingdom, on the other hand, asserts that those conditions are equivalent to those imposed on persons who normally engage in the transfer of shares on the United Kingdom market, and are essential if the 0.5% SDRT on each transfer of shares is to be properly collected.
71. In my view, however, a detailed examination of the requirements imposed for making the election and their proportionality is not in fact necessary in the present case. It must be observed that the election mechanism that is to say, the mechanism which is theoretically in closer conformity with Community law is indeed an 'option'. In other words, its application requires the taking of positive action, failing which rules conflicting with Community law are applied. Above all, as I observed above, the right to make an election is available, not to the person who might have the greater interest in making it, namely the person who transfers shares, but to the clearance services, which, in practice, do not pay the SDRT anyway. Besides, in some cases, such as the present case, the clearance service enjoys a legal monopoly in its country of origin: and so, ultimately, a service in those circumstances does not really have any incentive to make the election.
72. The situation would be different if the mechanism under which SDRT can also be paid at 0.5% in the case of shares placed with clearance services were the system normally applied, rather than being available by way of election. If that were the position, it would simply be necessary to consider the adequacy and proportionality of the requirements imposed on the clearance service from the technical point of view: if those requirements were not disproportionate, the system would be compatible with Community law.
73. In the present case, however, in view of the factual circumstances, a detailed examination of the requirements for making an election would appear superfluous.

IV Conclusion

74. In the light of the foregoing considerations, I propose that the Court give the following answer to the question referred to it by the Special Commissioners:

Article 11 of Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital precludes fiscal rules, such as those at issue in the present case, under which the issue of shares into a clearance service gives rise to a one-off payment of tax at 1.5% rather than to the 0.5% tax on transfers normally applied under national law.

---

1 Original language: Italian.

---

2 Council Directive 69/335/EEC of 17 July 1969 concerning indirect taxes on the raising of capital (OJ, English Special Edition 1969(II), p. 412).

---

3 IV/COM(64) 526 final.

---

4 CREST, as is apparent from the order for reference, is an organisation which manages share transfers in the United Kingdom. It is not a clearance service but a settlement system, in which ownership of the shares is visible to the outside world as well, in particular because it is entered in the company records. In clearance services, by contrast, ownership of the shares is shown only in the internal records of the service.

---

5 In some language versions of the Directive, in particular the German and Danish ones, Article 12 limits the exception to stock exchange transactions and not in general to all transfers of securities. However, the Court has held that it is necessary to adopt a uniform interpretation of Article 12, which reflects the majority of the language versions, thereby recognising that the exception applies to all taxes which relate to transfers of securities. See Case C-236/97 Codan [1998] ECR I-8679, paragraphs 22 to 30. The new directive, Council Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital (OJ 2008 L 46, p. 11), which replaced Directive 69/335 as from 1 January 2009, appears now to have resolved the matter definitively (see Article 6 thereof).

---

6 It goes without saying that the fact that in certain cases such taxation may be more favourable for potential taxpayers is irrelevant; see, for example, Case C-141/99 AMID [2000] ECR I-11619, paragraph 27, and Case C-383/05 Talotta [2007] ECR I-2555, paragraph 31.

---

7 See, for example, Case C-426/98 Commission v Greece [2002] ECR I-2793, paragraph 23 and the case-law cited, and Case C-46/04 Aro Tubi Trafilerie [2006] ECR I-3009, paragraph 26.

---

8 Case C-415/02 [2004] ECR I-7215.

---

9 Delivered on 15 January 2004 (see, in particular, points 39 to 41).

---

10 Commission v Belgium, cited in footnote 8, paragraph 37.

---

11 Case 36/86 Dansk Sparinvest [1988] ECR 409, paragraph 9, and Joined Cases C-71/91 and C-178/91 Ponente Carni and Cispadana Costruzioni [1993] ECR I-1915, paragraph 24.

---

12 That aspect was focused on particularly by HSBC, whose arguments, however, I do not find decisive. For a discussion of this question, see the Opinions of Advocate General Geelhoed of 16 June 2005 (points 26 to 30) and of Advocate General Trstenjak of 8 March 2007 (points 54 to 58) in Case C-466/03 Albert Reiss Beteiligungsgesellschaft [2007] ECR I-5357). Paragraph 58 of the judgment in Case C-466/03 could in fact be used as an argument that Article 12 should be interpreted as a limitation and not a derogation. That interpretation could also be supported by the observation that, in Article 6 of the new Directive 2008/7, in many language versions although not the Italian one the express mention of a 'derogation' has disappeared. However, it is true that, in Case C-193/04 Organon Portuguesa [2006] ECR I-7271, paragraph 20, the Court clearly endorsed the view that Article 12 of Directive 69/335 derogates from Articles 10 and 11 thereof.

---

13 See, in particular, Organon Portuguesa, cited in footnote 12. See especially paragraphs 18 to 20 of the judgment, in which the Court considers that the prohibition in Article 11 applies, in principle, to notarial fees payable on transfers of shares (not newly issued). Specifically, paragraph 19 reflects the view that any share transfer in general is caught by Article 11. See also, by analogy, Joined Cases C-31/97 and C-32/97 Fuerzas Eléctricas de Catalunya [1998] ECR I-6491, paragraphs 17 and 18, in which the Court considered a tax on repayment of a loan to be prohibited by Article 11(b) of the Directive.

---

14 As I indicated earlier, the present analysis of the compatibility of the United Kingdom rules with Community primary law is predicated on the assumption that those rules are compatible with Directive 69/335 even though, as stated, I do not agree with that premiss.

---

15 Nor should it be forgotten that Article 50 EC, in defining services, limits that category to activities that are not already 'governed by the provisions relating to freedom of movement for goods, capital and persons'.

---

16 Case C-302/97 Konle [1999] ECR I-3099, paragraph 22.

---

17 Case C-298/05 Columbus Container Services [2007] ECR I-10451, paragraphs 29 and 30.

---

18 See Case C-367/98 Commission v Portugal [2002] ECR I-4731, paragraph 56, and Konle, cited in footnote 16, paragraph 55.

---

19 Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (OJ 1988 L 178, p. 5). As regards the use of that directive by the Court for the purposes of defining the scope of the free movement of capital, see, for example, Case C-222/97 Trummer and Mayer [1999] ECR I-1661, paragraph 21, and Commission v Portugal, cited in footnote 18, paragraph 37.

---

20 Commission v Portugal, cited in footnote 18, paragraph 45 and the case'law cited.

---

21 Case C-513/03 van Hilten-van der Heijden [2006] ECR I-1957, paragraph 44 and the case'law cited.

---

22 Joined Cases C-163/94, C-165/94 and C-250/94 Sanz de Lera and Others [1995] ECR I-4821, paragraph 23; Case C-54/99 Église de scientologie [2000] ECR I-1335, paragraph 18; and Commission v Portugal, cited in footnote 18, paragraph 49. See also, more generally, Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 37.

---

23 See points 32 to 41 above.