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Edited version of your private ruling

Authorisation Number: 1012559262990

Ruling

Subject: Dividend withholding tax

Question 1

Is the Central Bank subject to dividend withholding tax under subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of dividend income derived from its Australian shareholdings?

Answer

No

This ruling applies for the following periods:

For the period 1 July 2012 to 30 June 2013

For the period 1 July 2013 to 30 June 2014

For the period 1 July 2014 to 30 June 2015

For the period 1 July 2015 to 30 June 2016

For the period 1 July 2016 to 30 June 2017

The scheme commences on:

During the period 1 July 2012 to 30 June 2013

Relevant facts and circumstances

The Central bank is the supervisor of the country's financial market. It was established under the Constitution of the country and carries out its activities in compliance with Act X and other regulations.

The Central Bank's primary objective is to maintain price stability and support the general economic policies of the government leading to sustainable economic growth.

The supreme governing body of the Central Bank is the Bank Board consisting of a Governor, Vice-Governors and other Bank Board members. All Bank Board members are appointed by the President of the country for a defined term.

The Central Bank shall independently and with due diligence manage the assets entrusted to it by the government of the country. The Central Bank shall defray the necessary costs of its operations from its income. The profit it generates shall be used to replenish its reserve funds and other funds created from profits and or other purposes in the budgeted amount. The Central Bank shall transfer the remaining profit to the country's government budget.

Central Bank's investment in Australia

As part of its international reserves administration the Central Bank has invested in shares in companies forming part of the S&P/ASX 200 Index (Australian shareholdings) for which it receives dividend income.

The Australian shareholdings are long-term investments and the Central Bank does not foresee any particular date for which its Australian shareholdings would be terminated.

Other matters

The Central Bank's Australian shareholdings in companies forming part of S&P/ASX 200 Index are less than 10%. The Central Bank is not represented on the board of directors of any Australian corporation in which it holds shares.

The Central Bank also invests in Australian government bonds for which it receives interest income.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 128B(1)

Reasons for decision

A non-resident that derives dividend income from a resident of Australia is liable to withholding tax under subsection 128B(1) of ITAA 1936 unless an exclusion applies. However, if the non-resident is a foreign state or a separate entity of a foreign state, then consideration needs to be given to the common law doctrine of sovereign immunity.

Sovereign immunity background

The Foreign States Immunities Act 1985 (Immunities Act) is an Australian Commonwealth Act which reflects the restrictive view of the common law doctrine of sovereign immunity.

It has been the long standing practice for the Australian Taxation Office (ATO) to follow the principles delineated in the Immunities Act to apply the more restrictive view of the doctrine of sovereign immunity when considering taxation matters.

Pursuant to this approach, an entity claiming sovereign immunity must satisfy three conditions:

If these three conditions are satisfied, it has been the long standing practice of the ATO to not impose the entity's liability to withholding tax in respect of dividend and interest income on the basis that the entity has satisfied the common law doctrine of sovereign immunity.

Condition 1: a 'foreign state' or 'separate entity' of a foreign state

A claim for sovereign immunity may only be made by a 'foreign state' (section 9 of the Immunities Act).

A foreign state is defined in section 3 of the Immunities Act to be a country outside of Australia that is either:

Sovereign immunity also extends to a 'separate entity' of a foreign state pursuant to section 22 of the Immunities Act.

A separate entity of a foreign state is defined in section 3 of the Immunities Act to be a natural person, body corporate or corporation sole that:

The Full Federal Court Decision in PT Garuda Indonesia Ltd v. Australian Competition and Consumer Commission [2011] FCAFC 52; (2011) 277 ALR 67 considered when an entity may be an agency or instrumentality of the foreign state.

In the above case [2011] FCAFC 52 at paragraph 128; (2011) 277 ALR 93 it is provided that the correct approach is to consider, on the whole of the evidence, whether the person is acting for, or being used by, the foreign state as its means to achieve some purpose or end of that state in the relevant circumstances.

Is the Central Bank a 'foreign state' or 'separate entity' of a foreign state?

The Central Bank is the supervisor of the country's financial market. It was established under the Constitution of the country and carries out its activities in compliance with Act X and other regulations. Under Act X the primary objective of Central Bank is to maintain price stability in the country.

Therefore, the Central Bank satisfies the condition that it is a 'foreign state' or a 'separate entity' of a foreign state.

Condition 2: commercial transaction

Under section 11 of the Immunities Act, a foreign state does not enjoy sovereign immunity in so far as the proceeding concerns a commercial transaction.

As suggested by the High Court in PT Garuda Indonesia Ltd v. Australian Competition & Consumer Commission [2012] HCA 33 at paragraph 5; (2012) 290 ALR 682, the necessity for sovereign immunity to be excluded from commercial transactions came about as a result of governments increasingly becoming engaged in various commercial activities and that immunity of governments involved in commercial activities was inconsistent with international law and it was undesirable.

As a result, Australia accepts that foreign states performing only governmental functions, rather than undertaking commercial transactions, may claim sovereign immunity.

This approach is consistent with the decision of the British House of Lords in I Congreso del Partido [1981] 2 All ER 1064, where it was held that activities of a trading, commercial or other private law character were not governmental functions.

Whether an operation or activity is a commercial transaction will depend on the facts of each particular case. As a guide, a commercial transaction 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.

Is Central Bank's Australian shareholdings regarded as a commercial transaction?

The Australian shareholdings to which the Central Bank is claiming for sovereign immunity to apply is not a commercial transaction for the following reasons:

Condition 3: monies are and will remain government monies?

In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested in the scheme are and will remain government monies.

Does the Central Bank's Australian shareholdings remain government monies?

One of the functions of the Central Bank as per Act X is that Central Bank shall independently and with due diligence manage the assets entrusted to it by the country.

The profit it generates shall be used to replenish its reserve funds and other funds created from profits and or other purposes in the budgeted amount. The Central Bank shall transfer the remaining profit to the country's government budget.

Accordingly, the condition that the monies being invested are and will remain government monies is satisfied.

Conclusion

As the three conditions provided above are satisfied, the Central Bank's claim for sovereign immunity on its Australian shareholdings has been established. In line with long standing practice, the ATO will not seek withholding tax in respect of the dividend income received by the Central Bank from its Australian shareholdings.

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