Edited version of private ruling

Authorisation Number: 1011540166942

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Ruling

Subject: Sovereign Immunity

Question 1

Is income derived in Australia by a foreign government entity (the entity) from its investments 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 ITAA 1936,

in accordance with the international law doctrine of sovereign immunity, where the entity also derives income from investments which are not exempt from Australian income and withholding tax under the international law doctrine of sovereign immunity?

Answer

Yes. The income derived in Australia by the entity from its investments is exempt from Australian income and withholding tax under the doctrine of sovereign immunity.

An investment of the entity which does not qualify for the sovereign immunity exemption will not affect the tax exempt status of other investments which do qualify for the tax exempt status under the doctrine of sovereign immunity.

Relevant facts and circumstances

The foreign government entity (the entity) is wholly owned by a foreign statutory body.

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

The entity also holds investments in an Australian trust which are considered to be a non-passive 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 of a business.

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 www.ato.gov.au 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

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, the funds used to make such investments are and remain government moneys and the agencies 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.

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.

In determining whether sovereign immunity from income tax applies to the income derived by the entity from its Australian investments, 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 income of the foreign government 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 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 entity to make its Australian investments are from the reserves of the foreign government and will remain so for the period that the entity holds the investments.

Condition 3

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

The income derived by the entity from its Australian investments are not from activities such as the trading of goods and services, buying, selling, bartering and transportation or carrying on of a business.

As the three conditions are satisfied, the income derived from Australian sources by the entity from its investments is exempt from Australian tax under the common law doctrine of sovereign immunity.

ATO Interpretative Decision 2002/45 (ATO ID 2002/45) which deals with the issue of sovereign immunity and withholding tax considers whether 'sovereign immunity applies to a particular operation or activity' (emphasis added).

The scope of an 'operation or activity' is to be limited to acts or things done arising from the transactions involved in a particular investment by the foreign government agency. An 'operation' and 'activity' in the ATO ID 2002/45 are not to be considered in the sense of all the investments a foreign government agency has in Australia constituting one operation or activity.

We consider that the doctrine of sovereign immunity is applied on an activity-by-activity basis.

This approach is consistent with the international common law doctrine relating to sovereign immunity. In considering whether sovereign immunity applied to the commercial activities of a foreign government, the House of Lords stated in I Congresso del Partido [1981] 2 All ER 1064 at 1071, per Lord Wilberforce, that:

If a trader is always a trader, a state remains a state and is capable at any time of acts of sovereignty. … The restrictive theory does not and could not deny capability of a state to resort to sovereign, or governmental, action: it merely asserts that acts done within the trading or commercial activity are not immune [from the jurisdiction of the courts]. The inquiry still has to be made whether they were within or outside that activity.

In applying the doctrine of sovereign immunity, therefore, it is necessary to consider an activity as acts that are done in respect of particular types of transactions.

Australian courts have also applied the 'commercial transactions' exception on a transactions basis within the context of the Foreign States Immunities Act 1985 (Cwth). For example, in Victoria Aircraft Leasing Ltd v United States [2005] VSCA 76, the Supreme Court of Victoria (Court of Appeal) held that a particular loan guarantee agreement was 'governmental' because the agreement was made 'as part of a package or program of assistance in return for political favours'. Although the loan guarantee agreement was part of a broader commercial agreement involving various parties, the court looked to the specific transaction (loan guarantee) and held that the US entered into the particular transaction as part of governmental duties. Therefore, sovereign immunity applied.

The entity's Australian investment which is considered to be a non-passive investment is not exempt from income and withholding taxes under the doctrine of sovereign immunity. Although it does not qualify for the sovereign immunity exemption, it is considered to be a separate activity from the entity's other investment activities that are exempt from Australian income and withholding taxes under the doctrine of sovereign immunity.

Conclusion

As the three conditions mentioned above are satisfied, the income derived from Australian sources by the entity from its Australian investments is exempt from Australian tax under the common law doctrine of sovereign immunity.

The entity's non-passive investment which do not qualify for the sovereign immunity exemption, will not affect the application of the doctrine of sovereign immunity to its other passive investments.

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