UK Sovereign Immunity from Direct Taxation

March 05, 2024

Sovereign immunity is a principle of public international law whereby one sovereign state should not seek to apply its law to another sovereign state. Alongside the jurisdictional immunity foreign sovereigns enjoy in the United Kingdom courts, the UK—like many other jurisdictions—also applies this doctrine to matters of taxation, exempting sovereign immune persons from UK direct taxes (such as income tax, capital gains tax, and corporation tax). Unlike the United States, the United Kingdom extends sovereign immunity from taxation to commercial activity (trading) income, and it differs in some other respects.

Availability of Sovereign Immunity

Sovereign immunity from taxation is available to the following:

  • Heads of foreign states (e.g., a reigning monarch or president)
  • Spouses of heads of foreign states
  • Foreign governments

It is also available to extensions of the state, including funds or bodies corporate. It is not, however, generally available to legal entities, which—although controlled by—are separate and distinct from the state. In practice, this can be a difficult distinction to draw and requires an analysis of the applicable constitutional law and framework to determine the precise nature of the entity.

By comparison, the United States’ section 892 regime specifically affords exemptions from US federal income tax to both “integral parts” and controlled entities, although the scope of the available exemption differs. This means that, although an entity may qualify for section 892, a separate analysis should be undertaken to confirm whether the entity also qualifies for UK sovereign immunity (or could qualify with appropriate structuring).

How Does the Immunity Work?

UK sovereign immunity from taxation is not granted automatically. An entity seeking to benefit from immunity must apply to and be granted it by the UK HM Revenue & Customs (HMRC). HMRC considers applications for sovereign immunity on a case-by-case basis, based on the circumstances of the government or entity in question.

If granted, sovereign immunity applies in respect of the following:

  • Income tax
  • Capital gains tax
  • Corporation tax

These taxes are charged on income, profits, and gains which are directly and beneficially owned by the immune person. In this regard, the United Kingdom’s sovereign immunity regime is much more generous than that of certain other jurisdictions in that it is not limited to passive income—such as interest and dividends—but extends to income derived from commercial activities (trading) income.

Immunity does not extend to indirect taxes, such as value added tax and excise duties. Additionally, they do not extend to stamp duties and other transfer taxes, such as stamp duty land tax. This means, for example, that whilst a sovereign immune person would not pay UK income tax on rental income derived from UK real estate, they would be required to pay any stamp duty land tax chargeable on the acquisition of the property.

If UK sovereign immunity from taxation is available, the sovereign entity largely falls outside the scope of the United Kingdom’s direct tax regime. Other than the initial application for sovereign immunity, the immune entity is generally not required to file any tax return to benefit from immunity.

Application to Investment Structures

UK sovereign immunity can also indirectly benefit investors in certain investment fund structures. For example, sovereign immune investors enjoy tax benefits under the UK real estate investment trust (REIT) regime, the substantial shareholding exemption, and the relatively new qualifying asset holding company (QAHC) regime, even where it holds its interest indirectly through wholly owned entities.

In addition to benefiting the sovereign immune investor, this may improve the overall tax profile of UK fund structures for investors, which may increase overall investor returns by reducing tax drag. This beneficial status is intended to promote investment in the UK and encourage large institutional investors—such as sovereign wealth funds—to invest in UK assets and through UK investment structures.

The Future of Sovereign Immunity in the UK

In 2022, the UK government consulted on restricting the scope of the sovereign immunity from UK direct taxation. At the time, there was concern that any reform would reduce the scope of sovereign immunity, but the UK government later announced that it would not proceed with the reform. The UK Chancellor confirmed in his March 2023 Spring Budget that the sovereign immunity exemption will continue to operate as it does now.

Why Does This Matter?

For investors who are eligible—or potentially eligible—for UK sovereign immunity, it is important to consider the structure of UK investments at an early stage. It is important to not assume whether or not immunity is available and whether a particular investment will benefit from it.

For investors who have not yet been granted UK sovereign immunity, it is important to remember that determining whether a government or entity is eligible is not always straightforward. For example, the extent to which a part or extension of a foreign government—or the provincial or state governments of constituent territories of federal states—can be considered sovereign persons can be complex, and specialist advice is recommended.

How We Can Help

Morgan Lewis lawyers are well-suited to advise clients on eligibility for UK sovereign immunity as well as the HMRC application process. We advise sovereign investors on the structuring of their investments in UK asset classes, including equity investments, debt, and real estate.

If you have any questions about UK sovereign immunity or would like more information on the issues discussed in this publication—including the benefits available to investors—please contact any of the following:


If you have any questions about UK sovereign immunity or would like more information on the issues discussed in this publication—including the benefits available to investors—please contact any of the following:

Kate Habershon (London)
Neil McKnight (London)
Grace Tan (London)