UK Government Considers Changes To The Rules On Sovereign Immunity From Direct Taxation

• Published date: 23 September 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Sovereign Immunity: Public Sector Government, Inheritance Tax, Income Tax
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Cadwalader, Wickersham & Taft LLP

The UK Government has recently consulted on a revised approach to sovereign immunity from direct taxation. The consultation was brought about owing to the view that whilst the scope of sovereign immunity-based exemptions has not changed over time, the magnitude of the income exempted through sovereign immunity has increased substantially. The UK Government identifies that this has, in part, been driven by both how sovereign immune persons invest and the nature of the investments in which they invest.

The UK Government has emphasised in the consultation document the need for the UK to continue to recognise the unique status of sovereign investors and ensure the UK remains an attractive jurisdiction for inward investment whilst also implementing rules that are transparent, appropriately targeted, applied consistently and in line with the international mainstream.

The current exemptions from direct taxation on the basis of sovereign immunity are assessed by HMRC on a case-by-case basis. Accordingly, the changes proposed would be implemented through legislation in order to give effect to the design principles outlined by the UK Government.

Eligibility and Scope

The UK Government proposal would apply to federal States (including their constituent territories but not municipal authorities), heads of State and foreign governments of a State or constituent territory of that State. The UK Government has sought particular input on the approach to be taken in relation to government departments and agencies, central banks, government funds and government pension schemes, noting that some persons may be exempt under existing alternative exemptions.

The UK Government consultation also proposed to narrow the types of income and gains that would be exempt from taxation. Currently, those eligible for sovereign immunity from taxation are exempted from UK direct taxation in respect of all UK sourced income and gains. However, the UK Government proposal would limit this exemption to income and gains from investment (rather than trading) activities and, specifically, investment of a more passive nature in assets that are more commonly held as part of the...