In a new consultation, the UK government proposes to codify and narrow the tax exemption for foreign sovereign persons, limiting exemption to investment income only and potentially bringing income from other activities within the scope of UK taxation.
Currently, foreign sovereign persons (including heads of state, monarchs, and sovereign wealth funds) are exempt from direct taxation on all their UK income.
Under the proposals:
principles of sovereign immunity will be comprehensively set out in legislation, to provide greater clarity and certainty;
immunity will be targeted at certain types of income, including income from investment rather than trading activity; and
the exemption will cover UK-source interest income, meaning that sovereign persons’ income and gains from UK immovable property and income from UK trading activity will be brought into tax.
In her foreword to the consultation, Lucy Frazer, Financial Secretary to the Treasury, says: ‘When considering what the exemption provided by the UK should look like going forward, a balance must be struck. On the one hand, providing some form of exemption recognises sovereign persons’ unique status and ensures that the UK’s approach is comparable to what other major countries do. On the other, ensuring sovereign persons pay a broadly comparable amount of tax to both UK and non-UK residents means that they will contribute more to the infrastructure they benefit from by investing in the UK.’
The government said it does not expect the proposals in the consultation, which would apply from April 2024, to negatively impact overall investment.
Ben Eaton, shareholder at Greenberg Traurig, said that although the announcement was technically a consultation rather than a firm commitment, ‘it isn’t even necessary to read between the lines to see that the government appears already to have concluded that exemption should be restricted to interest income. This means that rental income and capital gains from UK real estate would become taxable for sovereign investors who currently are exempt from UK tax.
‘If the government follows through the change will affect in particular sovereign investors who invest in real estate through entities, such as partnerships or G/JPUTs, that are transparent for UK tax purposes,’ Eaton said. ‘In principle, it will also affect other asset classes, but is likely to be less relevant for them because it is only real estate that is commonly held through fully tax transparent holding structures.
‘Sovereigns also benefit from special status in allowing taxable entities through which they invest to qualify for specific tax regimes: notably in a real estate context the regimes for REITs, qualifying asset holding companies (QAHCs) and for the purposes of the non-resident chargeable gains (NRCG) rules. The government is also re-examining this, but seems to recognise that institutional status for the purpose of these rules is less about a sovereign’s tax exemption per se and more about being a large scale institutional investor.’
The consultation closes on 12 September 2022. The government intends to publish draft legislation for consultation before including the provisions in a future Finance Bill.
In a new consultation, the UK government proposes to codify and narrow the tax exemption for foreign sovereign persons, limiting exemption to investment income only and potentially bringing income from other activities within the scope of UK taxation.
Currently, foreign sovereign persons (including heads of state, monarchs, and sovereign wealth funds) are exempt from direct taxation on all their UK income.
Under the proposals:
principles of sovereign immunity will be comprehensively set out in legislation, to provide greater clarity and certainty;
immunity will be targeted at certain types of income, including income from investment rather than trading activity; and
the exemption will cover UK-source interest income, meaning that sovereign persons’ income and gains from UK immovable property and income from UK trading activity will be brought into tax.
In her foreword to the consultation, Lucy Frazer, Financial Secretary to the Treasury, says: ‘When considering what the exemption provided by the UK should look like going forward, a balance must be struck. On the one hand, providing some form of exemption recognises sovereign persons’ unique status and ensures that the UK’s approach is comparable to what other major countries do. On the other, ensuring sovereign persons pay a broadly comparable amount of tax to both UK and non-UK residents means that they will contribute more to the infrastructure they benefit from by investing in the UK.’
The government said it does not expect the proposals in the consultation, which would apply from April 2024, to negatively impact overall investment.
Ben Eaton, shareholder at Greenberg Traurig, said that although the announcement was technically a consultation rather than a firm commitment, ‘it isn’t even necessary to read between the lines to see that the government appears already to have concluded that exemption should be restricted to interest income. This means that rental income and capital gains from UK real estate would become taxable for sovereign investors who currently are exempt from UK tax.
‘If the government follows through the change will affect in particular sovereign investors who invest in real estate through entities, such as partnerships or G/JPUTs, that are transparent for UK tax purposes,’ Eaton said. ‘In principle, it will also affect other asset classes, but is likely to be less relevant for them because it is only real estate that is commonly held through fully tax transparent holding structures.
‘Sovereigns also benefit from special status in allowing taxable entities through which they invest to qualify for specific tax regimes: notably in a real estate context the regimes for REITs, qualifying asset holding companies (QAHCs) and for the purposes of the non-resident chargeable gains (NRCG) rules. The government is also re-examining this, but seems to recognise that institutional status for the purpose of these rules is less about a sovereign’s tax exemption per se and more about being a large scale institutional investor.’
The consultation closes on 12 September 2022. The government intends to publish draft legislation for consultation before including the provisions in a future Finance Bill.
