HSBC 2005 Annual Report Download - page 405

HSBC HOLDINGS PLC
Taxation of Shares and Dividends
403
Taxation
The following is a summary, under current law, of
the principal UK tax considerations that are likely to
be material to the ownership and disposition of
shares. The summary does not purport to be a
comprehensive description of all the tax
considerations that may be relevant to a holder of
shares. In particular, the summary deals principally
with shareholders who are resident in the United
Kingdom for UK tax purposes and only with holders
who hold the shares as investments and who are the
beneficial owners of the shares, and does not address
the tax treatment of certain classes of holders such as
dealers in securities. Holders and prospective
purchasers should consult their own advisers
regarding the tax consequences of an investment in
shares in light of their particular circumstances,
including the effect of any national, state or local
laws.
Taxation of dividends
Currently no tax is withheld from dividends paid by
HSBC Holdings. However, dividends are paid with
an associated tax credit which is available for set-off
by certain shareholders against any liability they
may have to UK income tax. Currently, the
associated tax credit is equivalent to 10 per cent of
the combined cash dividend and tax credit, i.e.
one-ninth of the cash dividend.
For individual shareholders who are resident in
the United Kingdom for taxation purposes and liable
to UK income tax at the basic rate, no further UK
income tax liability arises on the receipt of a
dividend from HSBC Holdings. Individual
shareholders who are liable to UK income tax at the
higher rate on UK dividend income (currently
32.5 per cent) are taxed on the combined amount of
the dividend and the tax credit. The tax credit is
available for set-off against the higher rate liability,
leaving net higher rate tax to pay equal to 25 per cent
of the cash dividend. Individual UK resident
shareholders are not entitled to any tax credit
repayment.
Although non-UK-resident shareholders are
generally not entitled to any repayment of the tax
credit in respect of any UK dividend received, some
such shareholders may be so entitled under the
provisions of a double taxation agreement between
their country of residence and the United Kingdom.
However, in most cases no amount of the tax credit
is, in practice, repayable.
Information on the taxation consequences of the
HSBC Holdings scrip dividends offered in lieu of the
2004 fourth interim dividend and the first, second
and third interim dividends for 2005 was set out in
the Secretary’s letters to shareholders of 31 March,
1 June, 31 August and 6 December 2005. In each
case, the market value of the scrip dividend was not
substantially different from the dividend forgone
and, accordingly, the price of HSBC Holdings
US$0.50 ordinary shares (the ‘shares’) for UK tax
purposes for the dividends was the cash dividend
foregone.
Taxation of capital gains
The computation of the capital gains tax liability
arising on disposals of shares in HSBC Holdings by
shareholders subject to UK capital gains tax can be
complex, partly depending on whether, for example,
the shares were purchased since April 1991, acquired
in 1991 in exchange for shares in The Hongkong and
Shanghai Banking Corporation Limited, or acquired
subsequent to 1991 in exchange for shares in other
companies.
For capital gains tax purposes, the acquisition
cost for ordinary shares is adjusted to take account of
subsequent rights and capitalisation issues. Further
adjustments apply where an individual shareholder
has chosen to receive shares instead of cash
dividends, subject to scrip issues made since 6 April
1998 being treated for tax as separate holdings. Any
capital gain arising on a disposal may also be
adjusted to take account of indexation allowance
and, in the case of individuals, taper relief. Except
for gains made by a company chargeable to UK
corporation tax, any such indexation allowance is
calculated up to 5 April 1998 only.
If in doubt, shareholders are recommended to
consult their professional advisers.
Shares or ADSs held by an individual whose
domicile is determined to be the United States for
the purposes of the United States-United Kingdom
Double Taxation Convention relating to estate and
gift taxes (the ‘Estate Tax Treaty’) and who is not
for such purposes a national of the United Kingdom
will not, provided any US Federal estate or gift tax
chargeable has been paid, be subject to UK
inheritance tax on the individual’s death or on a
lifetime transfer of shares or ADSs except in certain
cases where the shares or ADSs (i) are comprised in
a settlement (unless, at the time of the settlement, the
settlor was domiciled in the United States and was
not a national of the United Kingdom), (ii) is part of
the business property of a UK permanent
establishment of an enterprise, or (iii) pertains to a
UK fixed base of an individual used for the
performance of independent personal services. In
such cases, the Estate Tax Treaty generally provides