French tax

New UK rules for sovereign wealth funds threaten investment, say tax experts

Foreign investment in the UK could be discouraged by ministers’ proposals to make sovereign wealth funds pay corporation tax on property and business ventures, tax experts say.

The Treasury on Monday 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.

“Although the government says this will not significantly change the level of foreign direct investment in the future, it is possible that this could be seen as a limiting exercise rather than an expansion exercise,” said Grant Wardell-Johnson, global head of tax policy at KPMG, the accounting firm.

“Some companies will be negatively affected and will have to consider restructuring for the future.”

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

“The government appears to believe that the strength of the UK economy will continue to attract investment into the UK and that tightening the tax regime to remove some of the advantages for sovereign wealth funds to invest directly will not significantly reduce attractiveness of the UK,” said Chris Sanger, head of tax policy at auditor EY.

However, the changes come as foreign direct investment in the UK has slowed. According to the EY Europe attractiveness survey, the number of FDI projects in the UK increased by 2% last year, but investment remained 10% below pre-pandemic levels.

“After seeking to benchmark the UK against other competitors, including France, which last year attracted more investment projects than the UK in EY’s attractiveness survey Europe 2022, the government hopes that any concerns about this policy change can be smoothed away, avoiding any disruption,” Sanger added.

The Treasury plans to introduce the rules in April 2024. SWF income from passive portfolio investments, such as stocks and bonds, would retain immunity from direct taxes under proposals made during the consultation. 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 that of other countries, including the United States, Australia and Canada, which are more prescriptive in their approach to taxing sovereign investors, as they are increasingly more engaged in commercial activities and land ownership. This gives them an unfair advantage over other institutional investors.

“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. “When 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. It’s anti-competitive and probably loses a significant amount of tax revenue.

The consultation follows notable investments in sovereign wealth funds in the UK. In May, Qatar’s sovereign wealth fund pledged to invest £10bn in the UK over the next five years, including in technology, healthcare, infrastructure and clean energy .

In April, British Land announced it had sold a 75% stake in its Paddington Central estate for £694m to Singaporean sovereign wealth fund GIC.

The consultation is open until September 12.

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.”