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Edited version of your written advice
Authorisation Number: 1012905890528
Date of advice: 6 November 2015
Ruling
Subject: Sovereign Immunity
Question 1
Is Entity A exempt from Australian income and withholding taxes in respect of the interest income derived from the fixed income securities pursuant to the relevant tax treaty?
Answer
Yes.
Question 2
Is Entity A immune from Australian income and withholding taxes on dividend income derived from its Australian shareholdings under the common law doctrine of sovereign immunity?
Answer
Yes.
This ruling applies for the following periods:
Year XXXX
The scheme commences:
During the year XXXX.
Relevant facts and circumstances
1. Entity A was established under an Act as a political or administrative sub-division or a local authority of a Contracting State under the relevant tax treaty.
2. Entity A receives certain moneys from various sources in accordance with its laws, which it holds and invests.
3. Entity A beneficially owns all the interest and dividend income from the investments that it holds.
4. Entity A beneficially owns all the investments from which it derives dividend income from.
5. The moneys invested by Entity A are expended for the sole purpose of providing benefits to the residents of Entity A in accordance with its laws.
6. Entity A is a non-resident entity that has investments in fixed income securities in Australia and shares in Australian companies.
7. Entity A receives Australian sourced interest income from its fixed income securities.
8. Entity A receives dividends from its Australian shareholdings.
9. Each shareholding held by Entity A in each Australian company is less than X% of the total shares on issue for each company.
10. Entity A is not entitled to and has not appointed a director to the Board of Directors of any of the Australian companies.
Reasons for decision
Question 1
The tax treaty states that interest arising in one of the Contracting States to which a resident of the other Contracting State is beneficially entitled may not be taxed in the first-mentioned State if the interest is derived by one of the Contracting States or by a political or administrative sub-division or a local authority thereof.
Entity A derives interest income from its Australian fixed income securities. This interest income is within the definition of interest in the relevant tax treaty.
The interest income is derived by Entity A which is a political or administrative sub-division of the other Contracting State. As a result, the interest income derived by Entity A in Australia will not be taxable in Australia in accordance with the tax treaty.
Question 2
For Australian income tax purposes it is accepted that the doctrine of sovereign immunity applies to foreign governments or an agency of a foreign government that engage 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:
1) that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;
2) that the moneys being invested are and will remain government moneys; and
3) that the income is being derived from a non-commercial activity.
If these three conditions are satisfied, the Australian sourced income and/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.
Entity A was established under an Act as a political or administrative sub-division or a local authority of a Contracting State under the relevant tax treaty. The moneys invested by Entity A are expended for the sole purpose of providing benefits to the residents of Entity A in accordance with its laws.
Therefore, it is considered that Entity A satisfies the requirement that it is a foreign government or agency of a foreign government.
Condition 2 - government moneys
It is necessary to establish that the moneys invested are and will remain the money of the foreign government or foreign government agency.
Entity A receives certain moneys from various sources in accordance with its laws, which it holds and invests. It beneficially owns all the interest and dividend income from the investments that it holds and also beneficially owns all the investments from which it derives dividend income from.
Further, the moneys invested by Entity A are expended for the sole purpose of providing benefits to the residents of Entity A in accordance with its laws.
The moneys invested by Entity A and the returns received from those investments are and remain government moneys. Therefore, it is considered that the second condition that the moneys being invested are and will remain government moneys is satisfied.
Condition 3 - non-commercial activity
Income derived by a foreign government or by any other body exercising governmental functions from investments in equities is generally not considered to be income derived from a commercial operation or activity. However, the extent of the relevant holding may, depending on the circumstances, give rise to questions as to whether it constitutes a passive investment or the carrying on of a business.
In determining whether Entity A's investments in Australian shares constitutes a non-commercial activity it is necessary to consider the degree of its actual or potential influence in respect of the financial, operating and policy decisions of each company in which it holds shares.
Each shareholding held by Entity A in each Australian company is less than X% of the total shares on issue for each company.
Further, Entity A is not entitled to and has not appointed a director to the board of directors of the Australian companies that it holds shares in. Therefore, Entity A has no ability to influence the operations of the companies it holds shares in.
Therefore, based on the facts, it is considered that Entity A's investments in Australian shares are non-commercial in nature.
Conclusion
As the three conditions for exemption under the doctrine of sovereign immunity are satisfied, Entity A will be immune from Australian income and withholding taxes for dividends received from its Australian shares.
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