1013136040433 | Legal database

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Edited version of your written advice

Authorisation Number: 1013136040433

Date of advice: 16 December 2016

Ruling

Subject: Sovereign immunity

Question

Will Company D, as the trustee of the Trust, be immune from interest withholding tax on interest income received by it under the common law doctrine of sovereign immunity?

Answer

Yes.

This ruling applies for the following period:

XXXX to XXXX

The scheme commences on:

During the income year ended XXXX.

Relevant facts and circumstances

1. Company D is a resident of a foreign country for tax purposes and a wholly-owned subsidiary of Company B.

2. Company A is a foreign resident company. The immediate holding company of Company A is Company B and the ultimate holding company is Company C.

3. Both Company B and Company C are incorporated in a foreign country.

4. Companies A, B, C and D are companies wholly-owned, directly and indirectly, by Entity A.

5. Entity A is a statutory body incorporated under the statute of a foreign government. Entity A was set up by the foreign government to own assets and act as a holding company for legal entities. Entity A has the full capacity to act on behalf of the foreign government.

6. The statute of the foreign government states that the President may vest, in Entity A, any property currently being vested in a public officer or authority, and vice versa.

7. The Trust is not a resident of Australia for income tax purposes. Company A is the sole unit holder of the Trust and Company D is the trustee of the Trust.

8. The central management and control of the Trust does not lie in Australia.

9. The funds used by the Trust to make investments form part of the reserves of the foreign government.

10. Company D, as the trustee of the Trust, entered into a debt investment agreement (the Agreement) with Entity X, an Australian resident. Under the Agreement, the Trust will provide a loan to Entity X.

11. The loan is required to be repaid in full. Interest is payable to the Trust on the loan.

12. Certain clauses of the Agreement provide protection to the Trust in relation to its debt investment.

13. Under the Agreement, no control element or voting rights will be acquired by the Trust in the business of Entity X.

14. The Trust does not hold any other debt investments.

15. The Trust does not engage in activities concerned with the trading of goods and services, such as buying, selling and bartering.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Reasons for decision

For Australian income tax and withholding 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.

When determining whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains 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 invested are and will remain government moneys; and

3. that the income or gain is being derived from a non-commercial activity.

If these three conditions are satisfied, then the income or gains will not be subject to Australian income tax and/or withholding tax.

Condition 1 - that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government

Entity A is a statutory body incorporated under the statute of a foreign government. Entity A was set up by the foreign government to own assets and to act as a holding company for legal entities.

Entity A has the full capacity to act on behalf of the foreign government.

The Trust and Company D are indirectly wholly-owned by Entity A and is being used by Entity A to make investments.

In view of the above, it is considered that Company D, as the trustee of the Trust, meets the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government.

Condition 2 - that the moneys invested are and will remain government moneys

The statute of the foreign government states that the President may vest in Entity A any property currently being vested in a public officer or authority, and vice versa. Thus the property which is vested in Entity A remains the property of the government, as the property is ultimately controlled by the President. Furthermore, the funds used by the Trust to make investments form part of the reserves of the foreign government, and will remain so for the duration that the Trust holds the investment.

In view of the above, it is considered that the moneys invested by Company D, as the trustee of the Trust, are, and will remain, the moneys of the foreign government. Therefore, this condition is satisfied.

Condition 3 - that the income or gain is being derived from a non-commercial activity

Generally, interest income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments is not considered to be income derived from a commercial operation or activity.

In determining whether the Trust's debt investment, that is, the loan provided to Entity X, constitutes non-commercial activity, it is necessary to consider the nature and extent of the investment.

In this regard the following matters are considered relevant:

● The loan does not enable the Trust to have any participation in the decision making of Entity X's businesses;

● Certain clauses of the Agreement provide protection to the Trust in relation to its debt investment;

● The Trust currently does not have, and has never had, any other debt investments apart from the loan under the Agreement; and

● The Trust does not engage in activities concerned with the trading of goods and services, such as buying, selling and bartering.

In view of the above, it is accepted that the provision of the loan by Company D, as the trustee of the Trust, to Entity X is a non-commercial activity.

Conclusion

As discussed above, the three conditions in relation to the loan held by Company D, as the trustee of the Trust, are satisfied. Accordingly, pursuant to the common law doctrine of sovereign immunity, Company D, as the trustee of the Trust, will be immune from interest withholding tax on interest income received on the loan.

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