ATO Interpretative Decision

ATO ID 2002/45 (Withdrawn)

Withholding Tax

Sovereign Immunity
FOI status: may be released
  • This ATO ID is withdrawn as the position stated in this ATO ID is no longer current. This ATO ID contains a view of the previous ATO administrative practice of providing sovereign immunity in certain circumstances. Schedule 4 to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 introduced Division 880 of the Income Tax Assessment Act 1997 (ITAA 1997) which codified and limited the scope of the sovereign immunity tax exemption. Division 880 of the ITAA 1997 completely replaced the previous ATO administrative practice. The current ATO position on this issue is contained in Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity which is effective from 1 July 2019.
    This document has changed over time. View its history.

Status of this decision: Decision withdrawn 16 December 2020.
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Is a foreign Government Agency eligible for 'exemption' from Australian withholding tax on dividend received?




A foreign Government Agency Fund holds investments in Australian securities and receives dividends from those shareholdings. Exemption was sought from Australian dividend withholding tax.

Reasons for Decision

Certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. An activity undertaken by a foreign Government Agency will generally be accepted as the performance of governmental functions provided that it is functions of government, provided that the agency is owned and controlled by the government and does not engage in commercial activities.

When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature. Whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, as a guide, a commercial activity is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business.

Income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments or investments in equities is generally not considered to be income derived from a commercial operation or activity. Accordingly, provided the funds used to make such investments are and remain government moneys, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity.

In relation to a holding of shares in a company, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or the carrying on of a business, but this would depend on the particular circumstances. A portfolio holding in a company (i.e., a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax.

To establish that sovereign immunity applies to exempt dividend and interest income from withholding tax, it is necessary to establish the following:

that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;
that the moneys being invested are and will remain government moneys; and
that the income is being derived from a non-commercial activity.

If these three conditions are satisfied, then the dividend and interest income will not be subject to Australian income or withholding taxes.

The doctrine of sovereign immunity only applies to foreign governments and their instrumentalities that engage in governmental functions. In determining whether a particular activity constitutes the performance of governmental functions we need to examine the nature of the activity conducted by the foreign government or its instrumentality. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

The foreign government Agency is engaged in exercising governmental functions and therefore is eligible for exemption from Australian withholding taxes in relation to dividends received.

Date of decision:  18 May 2001

Other References:
Press Release No 119 by the then Treasurer, The Hon P.J. Keating, MP (dated 5 November 1986)

Withholding tax exemptions
Sovereign immunity

Siebel/TDMS Reference Number:  DW205249

Business Line:  Public Groups and International

Date of publication:  24 January 2002

ISSN: 1445-2782

  Date: Version:
  18 May 2001 Original statement
You are here 16 December 2020 Withdrawn