NRF Client Briefing Sovereign Immunity From Direct Taxation Consultation On Policy Design

• Law Firm: Norton Rose Fulbright
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Sovereign Immunity: Public Sector Government, Corporate Tax, Capital Gains Tax
• Author: Mr Dominic Stuttaford, Matthew Hodkin, Michael Alliston and Julia Lloyd
• Published date: 25 May 2023

UPDATE 31/03/2023: It was announced on March 15th that the Government will not proceed with the proposals discussed in this briefing. In his 2023 Spring Budget, the Chancellor confirmed that the sovereignty immunity exemption "will continue to operate as it does now."

UK government consultation on sovereign immunity for direct taxation: some clarity, but not without reform

The government has published a consultation on a proposed reform of the UK rules regarding sovereign immunity from direct taxation. While the release of the consultation was largely a surprise for tax practitioners given the lack of fanfare surrounding the announcement, it signals that changes may be on the horizon that could have wide ranging tax consequences for foreign governments and heads of state investing into the UK.

The government cites three main reasons for introducing reform:

• bringing the UK's sovereign immunity regime more in line with the approaches adopted by other developed countries (essentially, limiting exemption to passive interest income);
• making the scope of exemption proportionate to the scope and scale of the investments being made by sovereign investors into the UK; and
• aligning the UK tax treatment of non-resident and sovereign investors more closely. While the consultation addresses all forms of sovereign investor (i.e. individual heads of state as well as various manifestations of government), in practice, it is sovereign wealth funds (SWFs) that are likely to be most impacted by these potential reforms, given their historic investment into the UK particularly into UK real estate.

Of particular note for investments into UK real estate, the proposals would bring sovereign investors within scope of the UK's property developer tax and non-resident capital gains tax regimes.

Sovereign investors will also want to monitor the consultation outcome in respect of a number of regimes designed to encourage investment in the UK such as the new qualifying asset holding company (QAHC) regime, real estate investment trusts (REITs) and the UK participation exemption for companies owned by certain qualifying institutional investors.

The consultation proposes introducing the new rules from April 2024.

What is the current position?

The UK's current position reflects an international law principle that one sovereign state should not seek to apply its law to another sovereign state. In the UK this has been interpreted by case law and HM Revenue & Customs practice as meaning...