UK Treasury plans to levy more corporation tax from sovereign funds

The UK government is proposing to make sovereign wealth funds pay corporation tax on property and commercial enterprises, in a move some tax experts say could deter foreign investment in Britain.

The Treasury launched a consultation this week on plans to bring the tax treatment of SWFs, which include some of the largest global investors, in line with other foreign institutional owners of UK property.

“There will be some businesses that will be adversely affected and will need to consider restructuring for the future,” said Grant Wardell-Johnson, global tax policy leader at KPMG, the accounting firm, who said the proposals could limit foreign investment rather than expand it.

The consultation says the government hopes to attract investment by putting the details of sovereign tax immunity rules into legislation “to provide greater clarity and certainty for foreign investors”. Under the current system, by contrast, eligibility is assessed by HMRC on a case-by-case basis.

Chris Sanger, tax policy leader at auditor EY, said the government appeared to hope that “the tightening of the fiscal regime to remove some of the benefits to sovereign wealth funds of investing directly will not significantly dampen the UK’s attractiveness”, largely because of the strength of the economy.

The Treasury plans to introduce the rules in April 2024. Under the proposals, SWFs’ revenue from passive portfolio investments, such as equities and bonds, would retain immunity from direct taxes.

HMRC said most sovereign wealth investment in the UK was via indirect equity ownership.

The plans would bring the UK’s taxation of foreign sovereign investors into closer alignment with their treatment in countries such as the US, Australia and Canada — and remove what some see as an unfair advantage over other institutional investors.

The issue has grown in significance in recent years, as sovereign funds have focused more on commercial activities and property ownership.

“The proposal is more restrictive than current practice, but the government sees it as a fair and proportionate restriction which will bring the UK more in line with the exemptions that other equivalent counties provide,” said Lucy Frazer, financial secretary to the Treasury. “The government does not expect the proposals in the consultation to negatively impact overall investment.”

Dan Neidle, founder of think-tank Tax Policy Associates, welcomed the proposals. “When most foreign investors are taxed on their UK trading and rental income, it’s never been clear why a sovereign wealth fund should be treated any differently,” he said. “It’s anti-competitive and probably loses a significant amount of tax revenue.”

The consultation, which is open until September 12, comes on the heels of several notable SWF investments in the UK. In May, the Qatar Investment Authority pledged to invest £10bn in the UK over the next five years, including in the technology, healthcare, infrastructure and clean energy sectors.

In April, British Land announced that it had sold a 75 per cent stake in its Paddington Central estate for £694mn to Singapore’s GIC.

HMRC said: “The government values the inward investment provided by foreign sovereign investors, and is committed to ensuring the UK remains an attractive destination for such investors, and maintaining the benefits this provides for both the UK and those who invest here.”