Sovereign immunity consultation: DLA Piper’s response

On 4 July, HM Treasury published a consultation on the UK’s sovereign immunity from direct taxation (the “Consultation”), which proposes to limit the existing sovereign immunity regime, as it applies to sovereign investors. The proposal, if adopted, would mean that sovereign immunity would be limited to providing exemption from UK withholding tax (WHT) on receipt of passive UK sourced interest income. Sovereign immunity on all other income and gains which under current rules provides an exemption on direct tax, would be disapplied. Please refer to our previous article for a summary of the Consultation proposals found here.

We acknowledge that it is the elected UK government’s prerogative to set tax policy in the UK. At the same time, we responded to a number of questions raised by HM Treasury in the Consultation, which can be found in the tab at the bottom of this page. Some of the key points include:

• Sovereigns play a vital role in providing much needed investment into the UK economy, in particular in the UK real estate sector.
• A stable tax environment is key, and numerous changes to UK tax legislation over recent years has led to one of the most complex tax regimes in the world, in particular with respect to UK real estate. Removing sovereign immunity will be another negative consideration when choosing where to make investments, not only in overall tax cost but also in terms of the potential impact on new and existing property holding structures.
• Sovereign investment affects direct investment (i.e. whereby sovereigns wholly own UK real estate directly / indirectly) but also investment through third parties such as Fund managers (otherwise known as Sponsors).
• The Consultation notes that the UK provides a generous exemption to tax for sovereigns as compared to most other jurisdictions (other than France). At the same time, a number of other jurisdictions, most notably the USA (but including other jurisdictions such as Italy and Australia), do provide tax exemptions to sovereigns holding minority, passive interests in real estate holding entities. If changes are to be made to limit sovereign immunity in the UK, consideration should be given to retaining such immunity to sovereigns holding a passive minority interest in the underlying entity.

Please click the link below to see our full Consultation response to HM Treasury.