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Edited version of your written advice
Authorisation Number: 1012755433699
Ruling
Subject: Sovereign immunity
Question 1
Is the interest income derived by the central bank (the Bank) exempt from Australian interest withholding tax under the doctrine of sovereign immunity?
Answer
Yes.
This ruling applies for the following periods:
1 July 2014 to 30 June 2015
1 July 2015 to 30 June 2016
1 July 2016 to 30 June 2017
1 July 2017 to 30 June 2018
1 July 2018 to 30 June 2019
The scheme commences on:
During the period 1 July 2014 to 30 June 2015.
Relevant facts and circumstances
The scheme the subject of this ruling is set out below.
1. The Bank is the central bank of a foreign country.
2. The Bank is incorporated under an act of parliament of the foreign country (the Act).
3. The Bank is managed by a Central Board of Directors (the Board) and chaired by a Governor who is appointed by the Federal Government of the foreign country. Its functions and responsibilities include formulation and monitoring of the monetary and credit policy.
4. The Bank reports every quarter to the Parliament of the foreign country on the state of the economy with special reference to economic growth, money supply, credit, balance of payments and price developments.
5. The Bank is not in the business of active money lending.
6. The Bank may manage its international reserves portfolio in the following manner:
• By purchasing, holding and selling currencies, financial and capital instruments, including indices and derivatives, issued by governments, agencies, local authorities, corporate and supranational in countries whose currency has been declared as approved foreign exchange by the Board;
• The permissibility of each asset class is determined by the Board; and
• The bank may appoint managers, custodians, consultants and any other professional advisors for the effective management of foreign exchange reserves of the country.
7. Income from the reserve management activity performed by the Bank becomes part of the foreign exchange reserves which are assets of the Bank.
8. The Bank has the sole right to issue bank notes and legal tender in the foreign country.
9. The Bank's surplus funds will be paid to the Federal Government of the foreign country.
10. The Bank and any subsidiary, or trust, established by it is not liable to pay wealth tax, income tax or super tax on their income or wealth in the foreign country.
11. The Bank shall not be placed in liquidation save by order of the Federal Government of the foreign country.
12. The ownership, management and control of all banks, including the Bank, was transferred to, and vest in, the Federal Government of the foreign country under an act of parliament of the foreign country.
13. All surplus funds are payable to the Federal Government of the foreign country.
Australian investments
The Bank has fixed interest securities (debt securities), a money market placement in AUD and an account with an Australian bank in Australia.
Reasons for decision
For Australian income tax purposes it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engages in governmental functions. 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.
To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or agency of a foreign government from Australian income tax and/or 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, the Australian sourced income or gains will not be subject to Australian income and/or withholding taxes.
Condition 1 - foreign government or agency of a foreign government
An investment undertaken by a foreign government or agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government.
The Bank was incorporated under the Act. It reports every quarter to the Parliament of the foreign country on the state of the economy, particularly economic growth, money supply, credit, balance of payments and price developments. Also, under the Act, the Bank shall not be placed in liquidation save by order of the Federal Government of the foreign country.
Therefore, it is considered that the Bank satisfies the condition that it is a foreign government or an agency of a foreign government.
Condition 2 - government moneys
The ownership, management and control of all banks, including the Bank, was transferred to, and vest in, the Federal Government of the foreign country under an act of parliament of the foreign country.
Also under the Act, the Bank's surplus funds will be paid to the Federal Government of the foreign country.
Therefore, the condition that the moneys invested are and will remain government moneys is satisfied.
Condition 3 - non-commercial activity
An investment undertaken by a foreign government or an agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. However, it is necessary to establish whether the investment is non-commercial in nature and this will depend on the particular circumstances of the investment.
The Bank has fixed interest securities (debt securities), a money market placement in AUD and an account with an Australian bank in Australia for which it derives interest income.
In addition, the Bank is not in the business of active money lending.
In view of the above, it is considered that the Bank's Australian investments are non-commercial.
Conclusion
As discussed above, the three conditions are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, the Bank will be exempt from liability to interest withholding tax on the interest income derived by the Bank.
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