NOMURA FUNDS IRELAND PLC v. THE COLLECTOR OF STAMP REVENUE

CACV 338/2019

[2021] HKCA 1040

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 338 OF 2019

(ON APPEAL FROM DCSA NO 4 OF 2017)

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REASONS FOR JUDGMENT
DECISION  ON  INTEREST

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Hon Au JA (giving the Reasons for Judgment and Decision on Interest of the Court):

A.  INTRODUCTION

1.  This is the appellant’s appeal against the decision of HH Judge Andrew Li (“the Judge”)  dated 22 March 2019 (“the Decision”).  By way of the Decision, the Judge dismissed the appellant’s appeal against the stamp duty assessment made by the respondent (“the Collector”)  on 13 January 2017 at a sum of HK$627,216 over an instrument titled “Common Merger Proposal” (“CMP”).

2.  The appellant first sought leave to appeal the Decision from the Judge.  After hearing the parties on 14 June 2019, the Judge refused to grant leave and handed down his reasons on 21 June 2019.

3.  On 16 July 2019, upon its renewed application, this Court granted leave to appeal to the appellant and the appellant filed its Amended Notice of Appeal on 7 May 2020.

4.  At the end of the hearing on 14 January 2021, we allowed the appeal and indicated that we will hand down our reasons in due course.  This is what we do now.

B.  BACKGROUND

5.  The background leading to this appeal has been summarized by the Judge at [2] - [13] of the Decision.  We shall only highlight the following for the purpose of this appeal.

6.  The appellant is an investment company incorporated under the laws of Ireland and established as an undertaking for collective investment in transferable securities (“UCITS”)  pursuant to the European Communities (Undertaking for Collective Investment in Transferable Securities)  Regulations, 2011.  One of its sub-funds is Nomura Funds-China Fund.

7.  Nomura Funds is another investment company incorporated in Luxembourg (“Nomura Luxembourg”)  and established as a UCITS pursuant to the amended Luxembourg law of 17 December 2010 on undertaking for collective investment (“2010 Luxembourg Law”), which implemented Council Directive 2009/65/EC published by the European Union on 13 July 2009 (“EU Directive”).  Its sole sub-fund is Nomura Funds-China Opportunities.

8.  Later, the appellant and Nomura Luxembourg proposed to merge Nomura Funds-China Fund (“the Receiving Sub-Fund”)  and Nomura Funds-China Opportunities (“the Merging Sub-Fund”), intending it to take effect from 27 April 2015 (“the Merger”). The draft terms of the proposed merger were set out in the CMP, the relevant ones were summarized by the Judge at [8] of the Decision as follows:

“8. The following are the key terms of the Merger Proposal: -

(1)  The Merger shall be effective on 27 April 2015.

(2)  On the effective date, in accordance with Article 1(20)  (a)  of the Luxembourg law of 17 December 2010 relating to undertakings for collective investment (‘the Luxembourg Law’):-

(a)  the Merging Sub-Fund will transfer all of its assets and liabilities to the Receiving Sub-Fund as a contribution in specie, in exchange for shares in the Receiving Sub-Fund to be issued to the sole shareholder of the Merging Sub-Fund;

(b)  the shares of the Merging Sub-Fund will be cancelled, and Nomura Luxembourg shall cease to exist.

(3)  The Merger is subject to the approval of the shareholder of the Merging Sub-Fund.”

9.  As can be seen from the draft terms in the CMP, the Merger as proposed was to be made in accordance with Article 1(20)(a)  of the 2010 Luxembourg Law.

10.  In this respect, the following Articles in the 2010 Luxembourg Law are relevant:

(1)  Article 1(20)  of the Luxembourg Law, which is a definitional section, provides that there are three types of operation which would fall within the meaning of “merger” under that law, respectively listed in Article 1(20)(a), (b)  and (c).  The Merger as proposed came under Article 1(20)(a), which provides:

“(a)  one or more UCITS or investment compartments thereof, the ‘merging UCITS’, on being dissolved without going into liquidation, transfer all of their assets and liabilities to another existing UCITS or an investment compartment thereof, the ‘receiving UCITS’, in exchange for the issue to their unit-holders of units of the receiving UCITS and, if applicable, a cash payment not exceeding 10% of the net asset value of those units.”

(2)  Article 67(1)  provides that a merger is subject to the prior authorisation by the Commission for the Supervision of the Financial Sector (“CSSF”), if the merging UCITS is established in Luxembourg.

(3)  Article 76(1)  of the Luxembourg Law is an operative section, which provides relevantly that:

“A merger effected in accordance with point (20)(a)  of Article 1 shall have the following consequences:-

(a)  all the assets and liabilities of the merging UCITS are transferred to the receiving UCITS or, as the case may be, to the depositary of the receiving UCITS;

(b)  the unit-holders of the merging UCITS become unit-holders of the receiving UCITS and, as the case may be, they are entitled to a cash payment not exceeding 10% of the net asset value of their units in the merging UCITS; and

(c)  the merging UCITS established in Luxembourg ceases to exist on the entry into effect of the merger.”

11.  It is pertinent to note that it was expressly stated in the CMP the Merging Sub-Fund will be merged in the Receiving Sub-Fund “in accordance with the terms of Article 1(20)(a)  of [the 2010 Luxembourg Law], which means that [Nomura Funds], on being dissolved without going into liquidation, will transfer all of its assets and liabilities to the Receiving Sub-Fund in exchange for the issue to its shareholders of shares of the Receiving Sub-Fund.” (emphasis added)

12.  Given the Merging Sub-Fund was established in Luxembourg, and that the Merger is one to be carried out in accordance with Article 1(20)(a)  of the 2010 Luxembourg Law, the Merger needed to be first approved by the CSSF before it could take effect.  Further, as stated in Article 76(1), when the Merger was effected, it shall have the consequence of, among others, having all its assets and liabilities transferred to the Receiving Sub-Fund.

13.  On 12 March 2015, pursuant to Article 67(1)  of the 2010 Luxembourg Law, the CSSF in Luxembourg notified Nomura Luxembourg that it had no objection to the proposed Merger.  On 9 April 2015, the sole shareholder of the Merging Sub-Fund also approved the Merger.

14.  The Merger took effect on 27 April 2015 and consequently the investment of the Merging Sub-Fund, including the securities listed on the Hong Kong Stock Exchange (“HK Securities”), were transferred to the Receiving Sub-Fund.  Nomura Luxembourg was later deregistered on 18 May 2015.

15.  On 29 May 2015, the solicitors for the appellant (“Deacons”)  wrote to the Collector seeking relief from ad valorem stamp duty (“AVSD”)  under section 27(5)  of the Stamp Duty Ordinance (Cap 117)  (“the SDO”)[1] with regards to the vesting of HK Securities in the Receiving Sub-Fund.

16.  In the course of the correspondence between Deacons and the Collector, the appellant had provided to the Collector two legal opinions (“the Two Luxembourg Legal Opinions”)  prepared by Luxembourg legal counsel of a Luxembourg law firm respectively dated 5 November 2015 (“the First Opinion”)  and 19 April 2016 (“the Second Opinion”)[2], which gave the opinion that the Merger and the transmission of the HK Securities to the Receiving Sub-Fund were effected by the operation of law under Articles 1(20)  and 76 of the 2010 Luxembourg Law but not the CMP.

17.  The applicant provided to the Collector the Two Luxembourg Legal Opinions in these circumstances.  After having considered the First Opinion, in his letter to Deacons dated 2 February 2016 (“the Collectors’ Letter”), the Collector disagreed with the First Opinion on the effect of the 2010 Luxembourg Law on the Merger.  The Collector instead expressed his own views that under the relevant articles of the 2010 Luxembourg Law, the transfer of Hong Kong Securities under the Merger was effected “in accordance with law” rather than “by operation of law”, and thus the subject transfer was not a transfer of Hong Kong stock by operation of law and should not be exempted from stamp duty under section 27(5)  of the SDO[3].  It was in response to the Collector’s said views that the appellant provided the Second Opinion to the Collector in further support of its case that the CMP was not a relevant stampable document.

18.  Despite the Two Luxembourg Legal Opinions, the Collector still concluded that the CMP was the instrument which effected the transfer of the HK Securities and thus it was chargeable with AVSD, and he assessed it to be at the sum of HK$627,216 (“the Stamp Duty Assessment”).

19.  The appellant then appealed the Stamp Duty Assessment to the District Court pursuant to section 14 of the SDO.  The Collector as the respondent filed the case stated as required under section 14(1), setting out the following three questions (“the Questions”)  for the court’s determination:

(1)  Whether the CMP is chargeable with stamp duty;

(2)  In particular, whether pursuant to the CMP, there was a change in beneficial ownership of the HK Securities; and

(3)  If the answer to (a)  is in the affirmative, what is the amount of stamp duty chargeable.

20.  After considering the parties’ respective cases, the Judge further formulated the substantive issue for his determination at [15] of the Decision:

“15. Or, in the words of the appellant’s solicitor Mr Stefano Mariani, who represents the appellant in the appeal, was the Merger Proposal [i.e, the CMP] an instrument chargeable with Ad Valorem Stamp Duty (‘AVSD’)  under Head 2(3)  of the First Schedule by virtue of being a transfer made for the purposes of effectuating a transaction whereby or under which beneficial interest in the HK Securities passed to Nomura Ireland, and not otherwise exempt from AVSD?”

C.  THE DECISION

21.  At the hearing before the Judge, the appellant’s main contention was that the Merger and the consequential effect of vesting the HK Securities in the Receiving Sub-Fund from the Merging Sub-Fund were effected by the operation of law under Articles 1(20)  and 76 of the 2010 Luxembourg Law.  It was therefore the 2010 Luxembourg Law but not the CMP that had effected the “transmission” of the HK Securities, and hence the CMP was not a chargeable instrument under the SDO.  For that purpose, the appellant relied on the Two Luxembourg Legal Opinions to support its contentions.

22.  On the other hand, the Collector submitted that it was the CMP with the terms as provided therein that had effected the Merger and the consequential vesting of HK Securities in the Receiving Sub-Fund.  It is the Collector’s views that the relevant statutory provisions in the 2010 Luxembourg Law were only of descriptive but not prescriptive effects.

23.  The Judge rejected the appellant’s contentions and accepted the Collector’s case.  His reasons can be summarized as follows:

(1)  First, the CMP stated that the transfer of the assets and liabilities of the Merging Sub-Fund to the Receiving Sub-Fund was to be done “in accordance with” (as contrast to “by operation of”)  Article 1(20)  (a)  of the 2010 Luxembourg Law.  Since Article 1(20)  (a)  only provided one of the three methods for mergers, the wordings in the CMP clearly did not mean that the Merger was to be effected by operation of law: [32] - [34] of the Decision;

(2)  Second, the Judge rejected the appellant’s submission that it was Article 76(1)  which effected the transfer of the HK Securities.  He accepted the Collector’s submissions that Article 1(20), adopted from the EU Directive, merely provided three merger techniques to allow cross-border and domestic mergers for Member States.  The transfer of HK Securities resulted from one of these merger techniques but not from the operation of any provisions in the 2010 Luxembourg Law.  The provisions in the 2010 Luxembourg Law only operated to recognize the transfer of assets resulting from a merger rather than to transfer the assets under the merger in question: [35] - [40] of the Decision;

(3)  In this respect, he refused to accept the Two Luxembourg Legal Opinions as he was of the view that the experts had failed to adequately explain or elaborate on the bases of their opinion: [41] - [47] of the Decision.

24.  After rejecting the appellant’s case that the vesting of the HK Securities in the Receiving Sub-Fund was by way of the operation of law under the 2010 Luxembourg Law, the Judge went on to consider the question of whether the vesting itself under the CMP was a “transfer” of those securities falling within meaning of Head 2(3)  of the First Schedule of the SDO[4] (as contended by the Collector)  or a “transmission” (and thus taking it outside Head 2(3))  as contended by the appellant.

25.  The Judge found the appellant’s use of word “transmission” (by operation of law)  was a red herring, as he considered the purported distinction between “transfer” (by voluntary acts)  and “transmission” adopted in other legal contexts (such as companies law or succession law)  was simply irrelevant to the present dispute.  He agreed with the Collector’s submission that the word “transfer” under Head 2(3)  of the First Schedule to simply mean “one parting with something to another”.  Given that it was expressly stated in the CMP that, on the effective date, all the assets and liabilities of the Merging Sub-Fund (including the HK Securities)  would be “transferred” to the Receiving Sub-Fund, the Judge concluded that the said transfer clearly fell within the meaning of a “transfer” under Head 2(3)  of the First Schedule: [48] - [53] of the Decision.

26.  On the issue of the beneficial ownership of the HK Securities, the Judge held that the appellant essentially repeated the argument that the HK Securities passed under the 2010 Luxembourg Law but not the CMP and thus rejected the said submission.  The Judge found that it was the CMP which implemented the merger and in turn the transferral of the beneficial interest of the HK Securities: [54] - [57] of the Decision.

27.  As a result, the Judge answered all the Questions in favour of the Collector and dismissed the appellant’s appeal.

D.  THIS APPEAL

D1.  Grounds of appeal

28.  The grounds of appeal raised by the appellant in the Amended Notice of Appeal are these:

(1)  The Judge erred in law in rejecting the evidence of Luxembourg law provided in writing by Luxembourg counsel at the request of the Collector (“Ground 1”);

(2)  Alternatively, the Judge erred in law by interpolating his own interpretation of Luxembourg law (“Ground 2”);

(3)  The Judge erred in law in finding that there was no material distinction to be drawn between a transfer and a transmission in the context of the charge to AVSD in the SDO (“Ground 3”);

(4)  Even if there had been a transfer of the HK Securities, the said transfer would be exempt under section 27(5)  of the SDO by virtue of being a transfer under which no beneficial interest passes (“Ground 4”).

E.  DISCUSSION

E1.  Grounds 1 - 3

29.  As it will transpire below, it is convenient to deal with Grounds 1 - 3 together as they all relate to the question of the interpretation of the 2010 Luxembourg Law and its relationship with the Merger.

30.  Before we deal with the merits of these grounds, it is convenient and important to note that Mr Jonathan Chang SC for the Collector has fairly and rightly accepted at the beginning of the hearing the following propositions for the purpose of this appeal:

(1)  If this Court is satisfied that the vesting of HK Securities was operated or effected by way of law under the 2010 Luxembourg Law without reference to any written instrument, stamp duty would not be chargeable as the CMP is not a stampable instrument under Head 2(3)  of the SDO.

(2)  The applicable law of the 2010 Luxembourg Law is Luxembourg law.  In relation to this, despite the absence of the words “transmission” or “universal succession” in the 2010 Luxembourg Law, the Court should consider the true substance of the transaction under the Merger in light of the 2010 Luxembourg Law to consider whether the vesting amounts to a transmission or universal succession by law.

(3)  As a matter of principle, the essential elements of transmission or universal succession are whether, upon merger, the receiving entity would be, for all intents and purposes, treated as good as the original entity in law, regardless of whether the original entity has ceased to exist or not after the merger.

(4)  Hence, in this case, the core question is whether principle of transmission or universal succession applies to the facts of this case by reference to the 2010 Luxembourg Law.

31.  Given these accepted propositions, it is obvious that if under Luxembourg law, the vesting of the HK Securities in the Receiving Sub-Fund under the Merger was indeed effected by operation of law under the 2010 Luxembourg Law as contended by the appellant, the CMP is not a stampable document for the purpose of the SDO, and the passing of beneficial interest in the Hong Kong Securities to the Receiving Sub-Fund is not liable for stamp duty.

32.  As mentioned above, the appellant relies on the Two Luxembourg Legal Opinions to support its above contentions.  Despite the fact that the Collector has not produced and relied on any contrary Luxembourg legal opinions to rebut the Two Luxembourg Legal Opinions, the Judge rejected these legal opinions.  He explained at [43] - [47] of the Decision the reasons for rejecting them:

“43. In this regard, I agree with Mr Chang that the court does not simply accept any stated opinion based on foreign law as being correct, even when there may be no legal opinion contradicting it. The court is entitled to, and indeed must, look at the basis of the legal reasoning and the relevant foreign statutory provisions in determining what weight, if any, should be given to the expert opinion: Full Wisdom Holdings Ltd & Others v Traffic Stream Infrastructure Co Ltd & Others [2004] 2 HKLRD 1016 at [23] per Le Pichon JA. A foreign law expert is obliged to set out not only his conclusion, but also the source materials, legal principles, and importantly his process of reasoning leading to that conclusion: Newmark Capital Corp Ltd v Coffee Partners Ltd [2007] 1 HKLRD 718 at [47] per Recorder Paul Shieh SC.

44. I note here that the first opinion obtained by the appellant dated 5 November 2015 (‘the First Opinion’)  stated that ‘the Merger was effected in accordance with and by operation of Article 1(20)(a)  of the Luxembourg Law[7]. However, this statement was made without any elaboration or explanation by the Luxembourg counsel. I also note that the First Opinion had identified Article 1(20)(a), rather than Article 76(1)  now relies upon by the appellant, as the provision that purportedly effected the Merger. The apparent difference in such opinion again has not been explained.

45. I also agree with the respondent’s observation that, whilst the second opinion dated 19 April 2016 (‘the Second Opinion’)  stated that ‘it is the operation of Article 76 that effects the transfer of the assets of the merging fund to the merged fund’, there was no explanation as to why the First Opinion previously identified Article 1(20)(a)  alone as the operating provision. More importantly, there was no elaboration in the Second Opinion as to why it was Article 76 of the Luxembourg Law, not [the CMP], that effected the transfer of the HK Securities. In this connection, I agree with Mr Chang’s observation that just because Article 76 ‘tells you what happens when a merger is approved by the CSSF and so effected’ does not logically mean the Merger was effected by that Article.

46. I further agree with the respondent that the Second Opinion barely asserted that [the CMP], in and of itself, is ‘incapable of transferring property from the merging fund to the merged fund’. No basis for such assertion was made. No relevant Article in the Luxembourg Law or any relevant Luxembourg law was identified. I agree with Mr Chang’s submission that such assertion was also not supported by a plain reading of:-

(1)  [the CMP] itself;

(2)  Article 67(1)  of the Luxembourg Law providing that a merger involving a Luxembourg UCITS is subject to prior authorization by the CSSF, rather than requiring the CSSF to effect the merger and the underlying transfer of assets;

(3)  the letter from the CSSF clearly stating that it had ‘no objection’ to the implementation of the Merger under the Merger Proposal, rather than the CSSF itself effecting it; and

(4)  Article 76(1)  of the Luxembourg Law.

47.  Based on the above reasons, I reject the appellant’s contention (and the Luxembourg counsel’s opinions)  that the transfer of the Merger was effected by operation of the Luxembourg Law.”

33.  In gist, the Judge rejected the Two Luxembourg Legal Opinions on the bases that (a)  they were apparently inconsistent with each other as the First Opinion identified Article 1(20)(a)  of the 2010 Luxembourg Law as the effective provision causing the vesting of the HK Securities upon merger, while the Second Opinion identified Articles 76(1), and (b)  the Second Opinion lacked legal analysis and was not supported by the plain reading of the statutory provisions and the documents.

34.  With respect to the Judge, we are of the view that he erred in his reasons for not accepting the legal opinions.  We will explain why.

35.  First, when properly read, the First Opinion and the Second Opinion are not inconsistent with each other.  To properly understand them, it is important to set out the relevant parts of the First Opinion and the Second Opinion as follows.

36.  Under the First Opinion, it is stated:

“…

In order to consider the applicability of relief under section 27 (5)  of the Hong Kong Stamp Duty Ordinance to the Merger, we understand. that you need a confirmation from Luxembourg counsel that the Merger was effected by operation of law and require a translation of the relevant legal provisions by which the Merger was effected.

We confirm that the Merger was effected in accordance with and by operation of Article 1 (20)  a)  of the amended Luxembourg law of 17 December 2010 on undertakings for collective investment (the ‘2010 Law’) which is a reproduction of the original English language text of article 2. 1. (p)  (i)  of Directive 2009,65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)  (the ‘UCITS Directive’)  as implemented into Luxembourg by the 2010 Law.

Article 76 of the 2010 Law describes the consequences of the Merger and implements Article 48 of the English language UCITS Directive.

The original French language texts of Article 1 (20)  a)  and Article 76 of the 2010 Law which have force of law in Luxembourg are a reproduction of the French language texts of, respectively, article 2. 1. (p)  and Article 48 of the UCITS Directive.

You will find below the relevant provisions of the 2010 Law as translated by us from the French original text:

[quoted Article 1 (20)  a)  and Article 76 of the 2010 Luxembourg Law]

As a result of the Merger, the Merging Fund ceased to exist as a separate legal entity on the effective date of the Merger and any rights and actions enforceable against the Merging Fund became enforceable directly against the Receiving Fund. This is because the Receiving Fund succeeded by operation of the 2010 Law to all the assets and liabilities of the Merging Fund.” (emphasis added)

37.  In the Second Opinion, it is relevantly stated:

“…

II. How a merger under the 2010 Law operates

Turning to the Stamp Office Letter, you are correct to refer to Directive 2009/65/EC (the ‘Directive’). The Luxembourg Law of 17 December 2010 (the ‘2010 Law’)  is the legislation implementing the Directive. As a matter of principle of EU law, Directives are not directly applicable. This means that directives need to be transposed into the national legislation of member States by way of implementing legislation (in our case, a law voted by the Luxembourg parliament). The contents of the 2010 Law is materially the same as the Directive, but, in the interests of clarity, we shall reference both the Directive and the corresponding provisions of the 2010 Law in this opinion.

The 2010 Law creates a statutory regime for the implementation of UCITS mergers in Luxembourg. Broadly speaking, it prescribes the kinds of mergers which may be effected under the 2010 Law, the conditions precedent to a merger taking effect, and the legal consequences thereof.

a)  Article 1 (20)  of the 2010 Law is the starting point. This is a definitional section. It identifies various forms a merger may assume under the 2010 Law. It is however not an operative section. It does not explain what happens when a merger occurs, but only how a merger may be effected.

b)  Article 67 of the 2010 Law provides that where the merging fund (i.e., the fund to be merged into the merged entity)  is established in Luxembourg, the merger is conditional on the prior approval by the Commission de Surveillance du Secteur Financier (‘CSSF’), which is the relevant financial services regulator in Luxembourg. Article 67(2)(a)  provides that the Common Draft Terms of the Proposed Merger must be prepared by both merging funds (i.e., both parties to the merger)  and must contain the information prescribed therein. Please note in this respect the specific nomenclature adopted by the statute in respect of the draft terms. It refers to a ‘proposed merger’. The draft terms in and of themselves are incapable of effecting a merger, or transferring any assets at all from one fund to another. The text of article 67(2)(a)  clearly states that they remain ‘Common Draft Terms of the Proposed Merger’ even after approval of the document by the merging and the receiving UCITS.

Once the merging fund and the merged fund provide the Common Draft Terms of the Proposed Merger and the requisite supporting documentation to the CSSF, the CSSF must determine whether the proposed merger meets the conditions prescribed in Article 67. The CSSF will authorise the merger where the prospective merger meets the applicable statutory conditions.

c)  We now turn to the effects of the authorisation of a merger by the CSSF. We have already noted that the Common Draft Terms of the Proposed Merger are merely a draft proposal. The latter is subject to the review of the CSSF for the protection of investors in the merging funds. But the Common Draft Terms of the Proposed Merger are, in and of themselves, incapable of transferring property from the merging fund to the merged fund. They are not in that sense a contractual document for the transfer of property. They are regulatory documents.

d)  The legal consequences of a merger as regulated by the 2010 Law are invariably those set out in Article 76.

Relevantly, one of those effects is that all the assets and all the liabilities of the merging fund are transferred to the merged fund. Article 76 accordingly tells you what happens when a merger is approved by the CSSF and so effected. It is the operation of Article 76 that effects the transfer of the assets of the merging fund to the merged fund, and not the Common Draft Terms of the Proposed Merger or any other document. There is no alternative to the operation of Article 76 and the consequences of the different types of mergers under the article 1 (20)  of the 2010 Law are invariably those set out in Article 76 (1)  to Article 76(3).

…” (emphasis added)

38.  In our view, the Two Luxembourg Legal Opinions are not inconsistent with each other as observed by the Judge.

39.  In the First Opinion, it in substance gave the view that (a)  Article 1(20)  of the 2010 Luxembourg Law defined and provided for the different types of mergers for the purpose of that law, and (b)  Article 76 of the 2010 Luxembourg Law provided for the effect (or consequence)  of a merger which was made in accordance with the form as defined in Article 1(20)  of the 2010 Luxembourg Law.  It then went on to conclude that it was thus by the operation of law that effected the vesting of those HK Securities upon the Merger (as one defined under Article 1(20)(a))  having been approved by the CSSF.  Properly read, what the Luxembourg legal experts had plainly stated in the First Opinion is that it is the combined effect of Article 1(20)  and Article 76 of the 2010 Luxembourg Law that had effected the transmission of HK Securities to the Receiving Sub-Fund upon the approval of the Merger (see in particular the underlined parts of the above quote).

40.  In the Second Opinion, the experts further confirmed the above view and explained it on these bases:

(1)  It explained that the 2010 Luxembourg Law created a statutory regime for the implementation of UCITS mergers in Luxembourg, and prescribed (a)  the kinds of mergers which might be effected under the law, (b)  the conditions precedent to a merger taking effect, and (c)  the legal consequences thereof.

(2)  It then went on to analyse and look at the structure of the various provisions and specific nomenclatures adopted by the statute under each of the relevant provisions (Article 1(20), Article 67 and Article 76)  to explain why as a matter of proper interpretation, it was by way of the operation of these provisions, in particular Article 76, that gave effect to the consequences of the merger in transferring the assets of the merging fund to the merged fund.  In particular, it pointed out that the Common Draft Terms of the Proposed Merger (such as the CMP)  was merely a “regulatory document” required under the law to be submitted to CSSF for approval and was not the document that gave effect to the transfer of assets and liabilities upon such approval.  In support, the legal experts observed that the relevant statutory provisions in the 2010 Luxembourg Law specifically used and continuously so used the terms “the proposed merger” and “draft terms” to refer to the merger and the document even after they had been approved by the CSSF as well as the merging and the receiving UCITS.

41.  Once read and understood as above, the Two Luxembourg Legal Opinions are clearly not inconsistent with each other.  Instead, the Second Opinion sought to provide a more detailed and reasoned legal analysis to explain why it was the combined effect of Articles 1(20)  and 76 that had effected the transfer of the HK Securities to the Receiving Sub-Fund after the approval of the Merger.  It did so by looking at the plain and ordinary meaning of the words used, and the structure of the relevant provisions adopted, in the 2010 Luxembourg Law.  These reasons appear to us to be both reasonable and sound, and are consistent with the plain reading of the provisions.

42.  Second, for these same reasons, the Judge is also wrong in concluding that the Two Luxembourg Legal Opinions lacked legal analysis and proper reasons.  As explained above, the Luxembourg lawyers have provided clear and cogent reasons in support of their views as understood under Luxembourg law (being the relevant applicable law).  Given these sound reasons, Mr Chang’s complaint that the opinions lacked the support of any authorities is neither here nor there.

43.  Mr Chang has further drawn our attention to Article 67(2)  of the 2010 Luxembourg Law, which provides expressly that the merging UCITS shall provide to the CSSF for approval of a proposed merger, among others, the common draft terms of the proposed merger duly approved by the merging UCITs and the receiving UCITs.  He submits that in light of this requirement, it is at least debatable that even under this law, it is still through the operation of the terms of merger proposal (such as the CMP)  which would give effect to the transfer of the relevant assets and liabilities upon the approval of a merger, and Article 76 only describes what the effect or consequence of an approved merger would be.  He then says the legal experts had not provided adequate reasons in the legal opinions as to why this is not the case in light of Article 67(2).

44.  With respect, there is also nothing in this argument.  As pointed out above, the Luxembourg legal experts have expressly dealt with Article 67(2)  in the Second Opinion by specifically stating that, given that this and the other provisions in the 2010 Luxembourg Law continue to refer to the terms as draft terms even after the merger has been approved, it is the operation of Article 76 which gives effect to the subsequent transfer of assets and liabilities in an approved merger but not the document.

45.  In the premises, in our view, there are no valid bases for the Judge to reject the Two Luxembourg Legal Opinions on the effect of the 2010 Luxembourg Law.  The Judge ought to have accepted those opinions and concluded that the vesting of the HK Securities in the Receiving Sub-Fund was effected through the operation of transmission by law but not by any written instrument (including the CMP).  Consequently, on this basis alone, the CMP is not a stampable document.

46.  Given the above conclusion, strictly speaking, it is unnecessary for us to deal with question of whether the vesting of the HK Securities is by way of universal succession or transfer.

47.  However, for completeness sake, we would deal with it briefly as follows.

48.  Given that the Merger is one as defined under Article 1(20)(a)  of the 2010 Luxembourg Law, the legal effect of it upon approval is as provided under Article 76(1)(a) - (c)  (see above).  Essentially for the present purpose, upon the approval of the Merger, all the assets and liabilities of the Merging Sub-Fund would be vested in the Receiving Sub-Fund, and the Merging Sub-Fund ceased to exist (as mentioned above, Nomura Luxembourg which held the Merging Sub-Fund has since in fact been deregistered).  As fairly accepted by Mr Chang (see [30] above), these meet the essential criteria of a universal succession by law despite the word “transmission” not being mentioned in these provisions.  It is thus clear to us that the subject vesting of the HK Securities in the Receiving Sub-Fund is by way of universal succession.  It therefore does not fall within Head 2(3)  of First Schedule to attract stamp duty.

49.  For all the above reasons, we will allow the appeal on Grounds 1 - 3.

E2.  Ground 4

50.  Given our conclusion above, it is unnecessary for us to deal with Ground 4.

F.  DISPOSITION

51.  We allow the appeal on Grounds 1 - 3 and answer the Questions posed in the Case Stated as follows:

(1)  Whether the CMP is chargeable with stamp duty: No

(2)  In particular, whether pursuant to the CMP, there was change in beneficial ownership of the HK Securities: No, as the change was not effected by way of the CMP

(3)  If the answer to (1)  is yes, the amount of stamp duty chargeable: this question does not arise

52.  We will therefore set aside the Order dated 14 June 2019 made by the Judge, and make the following orders:

(1)  The Stamp Duty Assessment made by the Collector on the CMP be annulled and set aside.

(2)  The Collector do refund the full amount of the duty paid by the appellant.

53.  After the hearing, the appellant in submitting its draft order for the court’s approval has sought to ask for interest on the refund of the duty paid at the rate of 8% per annum, accruing from the date of its payment to the Collector.  Although the appellant has in the Amended Notice of Appeal asked for an order that the Collector do refund the stamp duty paid with interest accruing from the date of payment at such rate as the Court thinks fit, the appellant did not make any submissions on this when we allowed the appeal at the end of the hearing.

54.  In light of the draft order, the court has since asked the parties to lodge further written submissions regarding the appellant’s claim for interest.  They have respectively done so on 19, 26 and 28 April 2021.  The court further held a short hearing on 13 July 2021 for the parties to further address the court on this matter in addition to their written submissions.

55.  In gist, the appellant claims interest on the basis of restitution, in that the Collector has since the payment and before refund unjustly had the benefit and use of the appellant’s sum, while at the same time, the appellant has been deprived of its use.  It therefore is entitled to interest.  Mr Mariani for the appellant relies on Woolwich Equitable Building Society v IRC [1993] AC 70[5]to support his contention that a taxpayer who pays tax assessed but not due has a restitutionary claim to repayment, provided this is not expressly excluded by statute, and by extension, the right to interest thereon.

56.  On the other hand, the primary contention of Mr Chang for the Collector is that the appellant is not entitled to interest on the refund as the statutory appeal regime under the SDO, properly construed, does not intend a stamp duty payer who succeeds in challenging the Collector’s assessment on appeal to have interest on any ordered refund.

57.  In our view, Mr Chang is correct in his submissions.  Our reasons are as follows.

58.  In Weson Investment Ltd v Commissioner of Inland Revenue [2007] 2 HKLRD 567 (CA), the plaintiff taxpayer was successful on appeal to the Board of Review in objecting the Commissioner’s assessment of profit tax.  The plaintiff then brought an action against the Commissioner claiming interest on the tax so refunded on the basis of unjust enrichment, relying on Woolwich.  The plaintiff’s claim was dismissed in first instance and it appealed to the Court of Appeal.

59.  The Court of Appeal dismissed the appeal and concluded that the relevant provisions and statutory regime in the Inland Revenue Ordinance (Cap 112)  (“the IRO”)  displaced any common law principles which afforded a right of recovery of interest on restitutionary grounds.  In gist, Tang VP (as he then was)  explained the reasons as follows:

(1)  Tang VP adopted and agreed with the sentiment expressed by Lord Keith in his dissenting judgment in Woolwich at 161C that the formulation of the precise grounds upon which overpayments of tax ought to be recoverable and of any exceptions to the right of recovery involved nice considerations of policy which were properly the province of the legislature and were not suitable for the consideration by the courts.  See [65] and [71].

(2)  Hence, it is a matter of statutory construction to ascertain the legislative intent as to “the circumstances under which payments of tax not lawfully due may be recovered, and also in what situations and upon what terms interest on overpayment of tax may be paid”.  See [66] and [72].

(3)  Under the IRO, when section 79(1), which provides for the refund of the overpaid tax by the Commissioner, was construed together with section 71, which gives the Commissioner a discretion to permit the holdover of tax on the purchase of Tax Reserve Certificate (which if purchased would bear interest), the statutory regime was intended to provide an exhaustive regime as to what could be recovered on the overpaid tax, and section 79(1)  was not intended to leave intact the common law right to recovery on restitution despite it was silent on interest.  See [70] - [77]

60.  In the present case, section 14 of the SDO provides for the statutory regime under which a stamp duty payer can appeal against the Collector’s assessment.  It provides relevantly as follows:

“(1)  Any person who is dissatisfied with the assessment of the Collector under section 13 or 47L may—

(a)  within a period of 1 month from the date on which the assessment is made or within such further period as the court may allow under subsection (5B);

(b)  subject to any order of the court under subsection (1B), on payment of the stamp duty in conformity therewith or, where payment of the stamp duty or any part thereof is allowed to be postponed under subsection (1A), on payment of the part (if any)  of the stamp duty the payment of which is not thus allowed to be postponed; and

(c)  by notice served on the Registrar,

appeal against the assessment to the court and may for that purpose require the Collector to state and sign a case setting forth the question upon which his opinion was required and the assessment made by him.

(1A)  Where—

(a)  an application in writing made for the purposes of this subsection by the person liable for payment of the stamp duty payable under an assessment of the Collector under section 13 or 47L is received by the Collector within 14 days from the date on which the assessment is made;

(b)  the person has stated in the application that he proposes to bring an appeal against the assessment under subsection (1); and

(c)  security to the satisfaction of the Collector has been given for the payment of the stamp duty that will, by reason of the exercise of the power by the Collector under this subsection, be postponed,

the Collector may, by notice in writing served on the person, allow payment of the stamp duty payable under the assessment to be postponed for such period, to such extent and on such terms as the Collector may think fit.

(1B)  Where the court, on an application made by the person intending to serve a notice under subsection (1), is satisfied that it would impose hardship on the person to require him to pay the stamp duty or the part of the stamp duty, as the case may be, under subsection (1)(b), it may by order allow the appeal to which the notice relates to be brought—

(a)  without payment of the stamp duty or the part of the stamp duty, as the case may be, under subsection (1)(b), or only on payment of such part of the stamp duty or the part of the stamp duty, as the case may be, as the court may consider reasonable in the circumstances of the case; and

(b)  on security being given to the satisfaction of the court for the payment of the stamp duty or the part of the stamp duty, as the case may be, that would, apart from this subsection, have to be paid before the appeal can be brought under subsection (1).

…

(3)  Upon the hearing of the case the court shall determine the question submitted, and, if the instrument in question is in the opinion of the court chargeable with any stamp duty, the court shall assess the stamp duty chargeable thereon.

(4)  If the amount of the stamp duty assessed by the court is less than the assessment of the Collector, the excess of stamp duty paid shall be ordered by the court to be repaid together with any excess of penalty paid under section 9, 45(5A)(d)  or 47H(3)  in respect thereof.

(5)  If in the opinion of the court the assessment of the Collector is not excessive, the court shall make an order confirming that assessment.” (emphasis added)

61.  In our view, properly construed, as in Weson, section 14 is intended by the legislature to provide an exhaustive appeal scheme and circumstances under which payments of stamp duty wrongly assessed may be recovered, and upon what terms on overpayment of duty may be paid:

(1)  Section 14(1), (3)  to (5)  provide expressly that a successful stamp duty payer on appeal shall be refunded with the excess payment by the Collector.

(2)  However, like section 71 of the IRO in Weson, section 14(1A)  provides the mechanism under which the stamp duty payer intending to appeal the assessment may ask for the postponement of the payment of the assessed duty by providing satisfactory security to the Collector. Similar to the regime of Tax Reserve Certificate, the stamp duty payer, as submitted by Mr Chang, could opt for and provide a form of security which is interest bearing (if he wishes to do so)  to protect his effective out of pocket position if at the end of the day he is successful in challenging the assessment.

(3)  As mentioned above, the circumstances and terms upon which overpayments of tax ought to be recoverable involve policy considerations.  In our view, when these provisions under section 14 are construed together, it is the clear objective intention of the legislature to adopt this particular statutory appeal scheme, with the express option for the appellant to provide security to the Collector, to be the precise circumstances and terms upon which excess payment of duty is to be refunded.  In other words, the legislature as a matter of policy has opted the provision of security mechanism as the measure to balance the need to have duty to be paid to the public purse first despite an appeal and the prejudice that may be suffered by the duty payer for making such payment in the event that he is successful in the appeal.  As such, it could not be the intention of the legislature to leave intact under this regime the common law right to recovery of overpaid duty (and thus interest)  on restitution as contended for by Mr Mariani.

62.  In this respect, Mr Mariani has however emphasized in his submissions that the security to be provided under section 14(1A)(c)  has to be one to “the satisfaction” of the Collector.  In the circumstances, there is no guarantee that the Collector would accept it, and thus the eventually successful duty payer on appeal will be left unfairly unprotected as to interest for his out of pocket excess payment.  This, he says, cannot be the objective intention of the legislature.

63.  We are not persuaded by this submission.  The Collector must exercise his discretion under section 14(1A)(c)  reasonably and for proper purpose, and that exercise is subject to the court’s supervision.  If he has plainly unreasonably refused to accept a security for the purpose of postponing the payment of stamp duty pending appeal, it must be open to the duty payer to apply to judicially review his exercise of power, even assuming[6] that Mr Mariani is correct that no resort can be made to the court under section 14(1B)  on the ground that deprivation of interest is a hardship.

64.  Mr Mariani also submits that the court in any event also has the power under section 49 of the District Court Ordinance (Cap 336)  (“the DCO”)  to order interest on all or any part of the debt or damages in respect of which judgment is given.  He contends that section 14 of the SDO cannot be intended to impliedly exclude the court’s jurisdiction provided under this section.

65.  Leaving aside the question of whether refund of the excess stamp duty ordered to be paid under section 14 of the SDO could properly be regarded in nature as “debt or damages” for the purpose of section 49 of the DCO[7], given our above conclusion that section 14 is intended to provide a complete and exhaustive regime on the circumstances and terms upon which on over paid stamp duty is to be recovered, it also could not be the intention of the legislature to leave intact the additional power of the court to grant interest on any such ordered refund of overpaid duty under section 49 of the DCO.  In any event, Mr Mariani’s only basis for the court to exercise its discretion to order interest under section 49 of the DCO is on the ground of restitution.  Once this basis is intended to be excluded by section 14 as we have concluded above, his submission on section 49 power does not assist the appellant in the present claim.

66.  For the above reasons, we will refuse the appellant’s claim for interest on the refund stamp duty.

67.  We further order costs of the appeal and below (including the costs of the leave to appeal application before the Judge)  be to the appellant, to be taxed if not agreed, save that the costs of and occasioned by the claim for interest (which include the costs of the written submissions and the hearing on 13 July 2021)  be to the respondent, to be taxed without certificate for two counsel if not agreed.