HM Treasury has published a consultation ‘Sovereign immunity from direct taxation: consultation on policy design’ which outlines the government’s proposal to legislate for, and better target, the UK’s exemption from direct tax for foreign sovereign investors, from April 2024.

In international law, the doctrine of sovereign immunity refers to the principle that one sovereign state should not seek to apply its law to another sovereign state.

As a consequence, in the UK, foreign sovereigns have an exemption from the liability to direct taxes, such as Income Tax, Capital Gains Tax and Corporation Tax, on their UK income and gains.

  • Foreign sovereigns include natural persons such as heads of state and monarchs and extensions of the state such as sovereign wealth funds and corporate bodies.

These exemptions are not codified into UK law but are based on case law and common practice.

Over a number of years, the magnitude of the income and gains exempted in the UK through sovereign immunity has increased substantially, resulting in a greater impact on the UK’s tax revenue.

This has led to the government identifying that there is a case to update the UK’s approach to sovereign immunity from direct tax. The consultation now published sets out the government’s proposals:

  • To legislate the principle of sovereign immunity and conditions of entitlement to tax exemption.
    • This is intended to provide greater certainty in respect of the persons and types of income the exemption will apply to.
  • To target sovereign immunity from direct tax towards certain types of income, specifically income that arises:
    • From Investment rather than trading activities.
    • In respect of investments that are of a more passive nature and more commonly held as part of an exercise of sovereign functions.
    • In respect of investments where an exemption creates the appropriate balance between supporting investment in the UK and delivering fairness between different participants in the UK market.

The consultation proposes that the exemption is targeted at UK source Interest income.

  • This means that sovereign persons’ income and gains from UK immovable property and income from UK trading activities would be brought within the scope of UK tax.

Views are particularly sought on:

  • The proposed approach for identifying eligible sovereign persons.
  • The proposed approach to the income that should benefit from exemption.
  • The proposed implementation timetable and transitional considerations.
  • The tax consequences of reforming sovereign immunity.
  • The proposed tax administration processes for sovereign persons.
  • The impacts of the proposed changes.

Consultation questions

  1. Do you have any comments on the proposed eligibility for sovereign immunity, and the proposed approach to exempting UK income?
  2. Do you have any comments as to the best way to define what persons or manifestations of the State should be eligible?
  3. Should the government include controlled entities as eligible for sovereign immunity in any new legislation? If so, how should they be defined?
  4. Should foreign government pension schemes be specifically excluded from eligibility from Sovereign immunity, since existing alternative exemptions from tax on their income and capital gains may be available to them?
  5. Do you have any comments on the proposed approach to sovereign non-natural persons, under Corporation Tax?
  6. Do you have any comments on the proposed approach to sovereign natural persons, under Income Tax and Capital Gains Tax?
  7. Do you have any comments on the proposed commencement date? Are there any practical issues that make this date inappropriate?
  8. Are there any other transitional arrangements that should be considered? If so, why?
  9. Do you have any comments on the transitional arrangements in respect of capital gains? Do you see any issues or complications arising with respect to rebasing that need to be addressed?
  10. Would automatic rebasing for all sovereign persons produce unfair results? If so, what mechanism do you think should apply to mitigate these?
  11. Do you have any details on the scale of foreign sovereign investment conducted through such holding and fund structures?
  12. Do you have any comments on how the government should approach existing qualifying investor status in relation to sovereign investors? In particular, are there any practical issues that could arise if this status were removed? If possible, please provide details of each area listed above in turn.
  13. Are there other areas of tax law where the proposed changes to sovereign immunity may have knock-on impacts?
  14. Do you have any comments on the proposed approach to Inheritance Tax?
  15. Do you have any comments on the proposed approach to international organisations?
  16. Do you agree that immunity from liability to direct tax should be removed from the Crown overseas and only the same immunities granted as those available to foreign Sovereigns?
  17. Do you have any comments in relation to the proposed approach to repealing the dominion governments' provision as set out in s.25 of Finance Act 1925?
  18. Do you have any comments on the proposed application process?
  19. Should applicants be required to provide information about all their investments and any changes to these?
  20. Should only the top entity that is immune be required to register for sovereign immunity if that entity is the beneficial owner of income that flows through a number of subsidiary entities?
  21. Do you have any comments about reporting?
  22. Do you have any comments on the proposal to require sovereign persons to follow the existing self-assessment processes under Income Tax, Capital Gains Tax and Corporation Tax? Are there any practical difficulties with this?
  23. Do you have any comments about tax payments?
  24. Do you have any comments about how to ensure compliance with the new rules?
  25. Do you have any comments about the removal of jurisdictional immunity in respect of liability to direct tax?
  26. Do you have any comments on this analysis, particularly on the extent to which SWFs and foreign public pension funds income is currently sheltered by sovereign immunity or Crown immunity, and the extent to which the proposed new rules will increase their overall tax liability?
  27. What are the most common ownership structures used for SWF and foreign pension fund investments in UK property?
  28. Are you aware of the extent to which foreign sovereign and Crown immune public pension funds are able to register for UK tax purposes or are eligible as overseas pension schemes, or of any other alternatives to sovereign immunity which SWFs and public pension funds would look to should the proposed changes to sovereign immunity go ahead?
  29. Are there any unintended consequences of these changes on foreign public pension funds?
  30. Are there any other legitimate mechanisms through which sovereign persons could continue to benefit from tax exemptions?
  31. Would sovereign investors be likely to reduce their overall investment into the UK as a result of the proposals? If so, to what extent?
  32. Are there particular asset classes which would be particularly affected by the changes, and if so, how would this affect sovereign entities’ allocations of these assets within their portfolios?
  33. What is the scale of investment in UK property by foreign sovereign individuals? Is such property likely to be rented out with a view to generating rental income, or held for purely private occupation purposes?
  34. Do you have any comments on the government’s expectations regarding economic impacts, including any potential impacts not reflected?
  35. With regard to property, how do you expect the proposal to impact the value of the types of properties commonly owned by sovereigns, and the rental yield required to make property investments viable when accounting for the change in tax liability?
  36. Aside from property, are there other types of asset class commonly invested in by sovereigns which will be affected by the proposal in a way which might materially change the market for them?
  37. Would other asset classes become relatively more attractive to sovereign investors as a result of the proposal?
  38. Do you have any comments on the impacts on individuals, households, and families?
  39. Do you have any comments on these impacts, or any other impacts which have not been covered here?


Responses can be sent by e-mail. The consultation closes on 12 September 2022.

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External link

HM Treasury: Sovereign immunity from direct taxation: consultation on policy design



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