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Arrowtown Assets Ltd. v The Collector Of Stamp Revenue

Judgment Cited authorities 13 Cited in 2 Precedent Map Related
Vincent
Judgment Date22 November 2001
Subject MatterStamp Duty Appeal
Judgement NumberDCSA52/2000
CourtDistrict Court (Hong Kong)
DCSA000052/2000 ARROWTOWN ASSETS LTD. v. THE COLLECTOR OF STAMP REVENUE

DCSA000052/2000

DCSA52/2000

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H E A D N O T E

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SWS owned a piece of land. It entered into a non-binding agreement with the Government for the surrender of the land and regrant of land for residential development at a premium. NT and Swire, which together beneficially owned CS, were interested in participating in developing the regranted land. SWS thus entered into a Heads of Agreement which was then replaced by a Share Sale Agreement with CS, NT and Swire ("arrangement"). Pursuant to the same, SWS formed 4 wholly-owned BVI subsidiary companies, EV, SC, PP and AT, in a straight line, each company owning 100% of the issued capital of the next one in the line, with SWS being the ultimate holding company at one end and AT being the last subsidiary company at the other end. Under the arrangement, SWS agreed to re-organise the share capital of PP into 1,000 ordinary 'A' shares and 100,000 non-voting and non-participating deferred 'B' shares, and cause SC to sell 980 'A' shares to CS for a cash price. Part of the sale price was to be used to pay the premium for the land exchange. It was a condition precedent to the sale of shares that the land after the exchange be transferred by SWS to AT in consideration of a price represented by a Loan Note issued by AT in favour of SWS. Further, under the arrangement, SWS had to assign the Loan Note to EV, EV to SC, and SC to PP. Upon completion, SWS had to deliver to CS a Deferred Consideration Agreement ("DC Agreement") signed by SWS and AT whereby AT agreed to pay as deferred consideration for the transfer of the land 12% of the surplus proceeds, if any, arising from the intended development of the land and the sale of the units therein, as well as a Shareholders Deed governing the inter-relationships of SWS, SC, CS, NT and Swire relating to PP and AT, as SC and CS were to become co-shareholders of PP.

The share capital of PP was reorganised and various transactions were carried out pursuant to the arrangement. As a result, SWS was paid the cash price for the sale of shares, part of which was utilised to pay the land exchange premium. The land exchange was completed, and by a Memorandum of Agreement and Assignment the regranted land was assigned by SWS to AT. The Loan Note was issued by AT in favour of SWS, which was eventually assigned to PP. 980 out of 1,000 'A' shares in PP (which had become the direct owner of the Loan Note and the indirect owner of the land through AT) were transferred to CS, which thus obtained the effective or de facto control and ownership of PP, notwithstanding that SC still remained the owner of 100,000 deferred 'B' shares that were non-voting and non-participating. SWS was also entitled to receive 12% of the surplus proceeds from the successful development of the regranted land by CS, NT and Swire, through PP and AT, as per the DC Agreement. Their rights inter se as shareholders of PP were governed by the new articles of PP and the Shareholders Deed.

SWS and AT claimed that the transfer of the regranted land by SWS to AT was an intra-group transfer of property, the stamp duty relief provisions in s.29H(3) and s.45 of the Stamp Duty Ordinance (Cap.117) applied, and therefore the instruments effecting the transfer, i.e. the Memorandum of Agreement and Assignment were not chargeable with ad valorem stamp duty. It argued that SWS and AT were and remained "associated" bodies corporate qualifying for intra-group relief because notwithstanding the sale of the 980 controlling 'A' shares in PP, SWS still indirectly owned over 90% "issued share capital" of the transferee, AT, in terms of the qualifying requirement in s.45(2).

The Collector of Stamp Revenue disagreed. First, part of the "consideration for the transfer of land", i.e. the DC Agreement to which CS was a party and the Shareholders Agreement to which CS, NT and Swire were parties, were "provided" by non-associated parties, thereby infringing the anti-avoidance provisions in s.45(4)(a). Second, the Loan Note, which formed part of the consideration for the transfer of land, was under the arrangement, to be "parted with" by SWS to EV, "in consequence of the carrying out of a transaction" involving a payment by a non-associated entity, namely, the payment of the price by CS for the purchase of the shares. The "transaction" was either the arrangement or the payment of the further deposit for the purchase of shares by CS in return for undertakings by SWS' solicitors to use the money to pay the land premium etc. All this infringed the anti-avoidance provisions in s.45(5). Third, the Collector argued that by an application of the Ramsay principle, the allotment of the 100,000 'B' shares in PP to SC which served only a fiscal purpose to preserve the superficial association required by s.45(2) after the sale of 980 controlling 'A' shares to CS should be disregarded, leaving the "end result" that after the sale of shares, PP and AT, the transferee, were no longer "associated" companies of SWS, the transferor, for the purpose of claiming relief under s.45(2). It was also argued that given the very restricted and illusory rights attached to the 'B' shares, they were not "shares" at all for the purpose of identifying the "issued share capital" of PP under s.45(2), and therefore SWS was no longer associated with AT after the transfer of land and sale of shares. It was further argued that using the Ramsay approach (as most recently developed by the House of Lords in Macniven v Westmoreland Investments [2001] 2 WLR 377), "consideration for the transfer" of land under s.45(4)(a) comprised the DC Agreement and Shareholders Deed, giving the phrase a wider commercial meaning in preference to the more restrictive meaning given to it by the majority in the older House of Lords decision Shop and Store v CIR [1967] AC 472.

The Collector accordingly assessed stamp duty on the Memorandum of Agreement as the principal instrument, at $349,658,565, against which assessment AT brought the present appeal by way of case stated pursuant to s.14 of the Ordinance.

Held, dismissing the appeal with costs, that:

(1) Identification of the consideration for the transfer of the land was a question of fact, but it also involved questions of law in the construction of documents. Phillips v Brewin Dolphin Bell Lawrie Limited [2001] 1 WLR 143 followed.

(2) "Consideration" in s.45(4)(a) means "consideration for the transfer", not "consideration for the arrangement", but depending on the facts, the two need not be mutually exclusive and may overlap with each other. Majority decision in Shop and Store explained and followed.

(3) The DC Agreement formed part of the consideration for the transfer of the land. It was signed by CS as part of the arrangement. CS made promises in favour of SWS either under clause 14 of the DC Agreement or the whole agreement relating to SWS' right to receive the 12% surplus proceeds as deferred consideration for the transfer of land. The taxpayer could not subsequently go back on the allocation of consideration and seek to re-allocate the same for tax purposes. E V Booth (Holdings) v Buckwell (Inspector of Taxes) [1980] STC 578 applied. As CS was a non-associated entity, part of the consideration for the transfer of land was "provided" by a non-associated entity under the arrangement, thereby infringing s.45(4)(a).

(4) The Shareholders Deed, which was said to contain important provisions guaranteeing, protecting, safeguarding, enhancing or entrenching SWS' right to receive the deferred consideration under the DC Agreement, did not form part of the consideration for the transfer of land, but rather the sale of shares under the arrangement. The Collector could not go behind the consideration agreed by the parties in the documents in the absence of dishonesty or lack of straightforwardness. Stanton (Inspector of Taxes) v Drayton Commercial Investment Co. Ltd. [1982] STC 585 applied. Nor did CS, NT and Swire, by executing the Shareholders Deed, indirectly provide part of the consideration for the transfer of land. Curzon Offices v IRC [1944] 1 All ER 163, [1944] 1 All ER 606 (CA), explained and distinguished.

(5) Under s.45(5), the consideration may have been "parted with" to an associated company instead of an outsider, and an "arrangement" may have been at the same time a "transaction"; and this was such a case. The Loan Note, being part of the consideration for the transfer of land, was, under an arrangement contained in or evidenced by the Heads of Agreement as replaced by the Share Sale Agreement, to be "parted with" to EV, "in consequence of the carrying out of" a "transaction", namely, the arrangement itself, involving a payment by CS, a non-associated company, of the price for the sale of shares, thereby infringing s.45(5).

(6) However, it was too artificial on the facts to call the payment of the further deposit for the purchase of shares and the giving of undertakings in return a "transaction" in consequence of the carrying out of which the Loan Note was to be parted with under the arrangement.

(7) The Ramsay approach, as explained by Macniven, had no application in the present case, even though it may apply to stamp duty legislation in an appropriate case. The relevant statutory "concept" employed by s.45(2) was "associated body corporate" which was in turn defined by another "concept", namely, "issued share capital", both being "legal" concepts which had no broader commercial meanings. The Ramsay approach was not applicable to such legal concepts and therefore the allotment of the 'B' shares could not be disregarded as serving no commercial (other than fiscal) purpose. Macniven followed. In any event, regardless of whatever intermediate steps with no commercial purpose that...

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