Edited version of private ruling

Authorisation Number: 1011463787563

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Ruling

Subject: Sovereign Immunity

Question

Is income derived in Australia by a foreign government entity exempt from:

· income tax under section 6-20(2) of the Income Tax Assessment Act 1936 (ITAA 1936); and

· withholding taxes under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936),

in accordance with the international law doctrine of sovereign immunity?

Answer

Yes. The income derived in Australia by a foreign government entity is exempt from Australian income and withholding tax under the common law doctrine of sovereign immunity.

This ruling only applies to the income derived in respect of the arrangement as described and does not apply to income derived in respect of any event of default by the borrowing entity.

Relevant facts and circumstances

The foreign government entity is wholly owned by a foreign statutory body. Its principal activity is to undertake all kinds of investment business.

The funds used by the foreign government entity to make the investment are monies of the foreign government and will remain so for the period that the foreign government entity holds the investment.

The foreign government entity does not engage in activities such as the trading of goods and services, buying, selling, bartering and transportation or carrying on a business in respect of the debt investment.

The Scheme that is the subject of this Ruling also incorporates the documents received with the application for the Ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B.

Income Tax Assessment Act 1997 6-20(2).

Taxation Administration Act 1953 Section 15.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Sovereign immunity

While the taxation legislation itself does not provide exemption specifically for foreign governments, the Australian government does recognise the international law doctrine of sovereign immunity and will provide exemption on investments of foreign governments and monetary authorities of foreign governments where the monies being invested are and will remain government monies (for example, investment of foreign reserve assets) and are invested in passive (that is, non-commercial) type investments. This is usually regarded as meaning investment at interest in traditional instruments such as bonds or a portfolio (that is, a holding of 10% or less of the equity in a company) holding of shares.

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 will generally be accepted as the performance of governmental functions provided that the agencies are owned and controlled by the government and do not engage in ordinary commercial activities.

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.

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 a particular case, to establish that sovereign immunity applies to ordinary income from income 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 monies being invested are and will remain government monies, and

· that the income is being derived from a non-commercial activity.

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

Condition 1

· that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;

The foreign government entity is incorporated under the laws of the foreign country. Its ultimate holding company is a government entity created by its foreign country legislation.

Condition 2

· that the monies being invested are and will remain government monies, and

The funds used by the foreign government entity to make the investment are monies of the foreign government and will remain so for the period that the foreign government entity holds the investment.

Condition 3

· that the income is being derived from a non-commercial activity.

The foreign government entity does not engage in activities such as the trading of goods and services, buying, selling, bartering and transportation or carrying on a business in respect of the debt investment.

Accordingly, an exemption under the principles of sovereign immunity for income tax and withholding tax is available on the relevant income.

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