SWFs and taxation: National, bilateral and multilateral approach

Taxes are, if not a driver, at least a critical factor for investors, when investing abroad. Sovereign Wealth Funds are not different from other investors in this respect. That notwithstanding, unlike operators, scholars have hardly paid attention to the 'SWFs' tax exemption factor'. Thus, there is still room for investigation and research. Some States exempt SWFs from paying taxes, according to a common practice and generally accepted principle that one government does not tax another. Scholars usually focus on US law and regulations, providing for a general tax exemption, but State practice is wide ranging, from exemptions applied to both commercial and non-commercial transactions, to both portfolio investments and FDI (UK), to exemptions limited to non-commercial investments (Canada) or to passive, portfolio investments (Australia); again, from a dual system, where exemption is granted by law to portfolio investments, and by the ministry of finance to FDI (France), to a general exclusion of exemption (Germany, Switzerland, Poland, Norway). A comparative analysis of both treatment and grounds for tax exemption applying to SWFs is carried out in Chapter 8. The existence of a direct or indirect relationship between tax exemption and State immunity (from jurisdiction) has been investigated as well. At a first glance, the two elements seem strictly and directly connected indeed, while the States’ practice reveals more graduated shadings: there is not always a relationship between a partial or total tax exemption and a relative or absolute immunity granted by host States. Further questions arise from subjective features: whether a tax exemption applies both to SWFs and to State-owned entities (SOEs) is still a disputed matter. In theory, host States should grant a tax exemption to SWFs more than to SOEs, as the former are State investors, and the latter are companies operating abroad and subject to host-State company law, regardless of their owner. On the contrary, the common practice is quite surprising. The practice adopted by States when it comes to the taxation of SWF investments may fall into one of the following three main groups. The first one consists of States whose national laws grant tax exemption to sovereign investments based on the accepted belief that they are implementing a general principle of international law: par in parem iudicium non habet. In this first group, tax exemption is seldom absolute, while more often it depends on the nature of the business. In the second group we find those States where limited or absolute tax exemption is granted under a bilateral investment treaty, usually on a reciprocity basis. The last group is that of States that do not grant any tax exemption to foreign investments, either relative or absolute, under any condition.