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

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Foreign investment in the UK could be deterred by proposals from ministers to make sovereign wealth funds pay corporation tax on property and commercial enterprises, say tax experts.

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

“While the government is saying this will not significantly change the level of foreign direct investment in the future, it is possible that this could be viewed as a limiting exercise rather than expanding one,” said Grant Wardell-Johnson, global tax policy leader at KPMG, the accounting firm.

“There will be some businesses that will be adversely affected and will need to consider restructuring for the future.”

The government hoped to attract investment by putting the details of sovereign tax immunity rules into legislation “to provide greater clarity and certainty for foreign investors”, the consultation said. 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’s economy will continue to draw investment into the UK and 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,” said Chris Sanger, tax policy leader 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 UK FDI projects grew 2 per cent last year but investment remained 10 per cent below pre-pandemic levels.

“Having sought to benchmark the UK against other competitors, and notably France which last year attracted more investment projects than the UK in EY’s 2022 Europe Attractiveness Survey, the government will be hoping that any concerns about this change in policy can be smoothed over, avoiding any disruption,” Sanger added.

The Treasury plans to introduce the rules in April 2024. Sovereign wealth funds’ revenue from passive portfolio investments, such as equities and bonds, would retain immunity from direct taxes under proposals made in the consultation. HMRC said that most sovereign wealth investment in the UK was via indirect equity ownership. 

The plans would bring the UK’s taxation of foreign sovereign investors in closer alignment with other countries, including the US, Australia and Canada, which are more prescriptive in their approach to taxing sovereign investors as they have become increasingly engaged in commercial activities and property ownership. This is seen to give 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 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. It’s anti-competitive and probably loses a significant amount of tax revenue.”

The consultation comes on the heels of notable sovereign wealth fund investments in the UK. In May, Qatar’s sovereign wealth fund 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 Singaporean sovereign wealth fund GIC.

The consultation is open until September 12.

The 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.”

Source: Financial Times

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