UK Treasury plans to levy more corporate tax on SWFs

The UK government is proposing to make sovereign wealth funds pay corporation tax on property and business ventures, which some tax experts say could discourage foreign investment in Britain.

The Treasury this week launched a consultation on plans to bring the tax treatment of sovereign wealth funds, which include some of the world’s biggest investors, into line with that of other foreign institutional owners of UK property.

“Some companies will be negatively affected and will have to consider restructuring for the future,” said Grant Wardell-Johnson, global head of tax policy at KPMG, the accounting firm, who said the proposals could limit foreign investment rather than to develop oneself. this.

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

Chris Sanger, head of tax policy at auditor EY, said the government seemed hopeful that “tightening the tax regime to remove some of the advantages for sovereign wealth funds to invest directly will not significantly reduce the attractiveness of the UK”, in large part due to the strength of the economy.

The Treasury plans to introduce the rules in April 2024. Under the proposals, SWF income from passive portfolio investments, such as stocks and bonds, would retain immunity from direct taxes.

HMRC said most sovereign wealth investment in the UK is through indirect equity.

The plans would bring UK taxation of foreign sovereign investors closer to 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 gained prominence in recent years, with sovereign wealth funds focusing more on commercial activities and land 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 exemptions granted by other equivalent counties,” said Lucy Frazer, Treasury Financial Secretary. . “The government does not expect the consultation proposals to have a negative impact on overall investment.”

Dan Neidle, founder of the Tax Policy Associates think tank, welcomed the proposals. “While most overseas investors are taxed on their business and rental income in the UK, it has 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, open until September 12, follows several notable investments by sovereign funds in the United Kingdom. In May, the Qatar Investment Authority pledged to invest £10 billion in the UK over the next five years, including in technology, healthcare, infrastructure and clean energy sectors.

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

HMRC said: “The Government appreciates the overseas investment provided by overseas sovereign investors and is committed to ensuring that the UK remains an attractive destination for such investors and to maintaining the benefits this brings to both the UK United and to those who invest here.”