Sovereign immunity from direct taxation – Law Society response
'Sovereign immunity' refers to the principle that one sovereign state should not seek to apply its law to another sovereign state.
In the UK, this has been interpreted to mean that foreign sovereigns (which is extended so that it can include not just natural persons, but also some state-linked funds/companies such as sovereign wealth funds) have exemption from liability to direct taxes.
The consultation proposes that sovereign immunity from tax should be set out in legislation and should be more targeted, so as to apply only to income that arises from a limited range of investment activity.
That would bring income and gains from UK immoveable property, and income from UK trading activities, within the charge to tax.
Our submission seeks to identify and explain some of the likely practical implications of the proposed measures.
These include potential consequences for both existing arrangements and structures and for future developments, particularly in relation to:
- inward investment in UK real estate
- the UK as a location for the investment management operations of sovereigns
We seek to identify potential policy options that HM Treasury and HM Revenue and Customs might consider to address those potential consequences, assuming they decide to proceed with changes to the sovereign immunity tax rules.
The consultation closed on 12 September.
If the proposals are taken forward further, we would expect draft legislation to be published for technical consultation ahead of its inclusion in a future Finance Bill.