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Edited version of your written advice
Authorisation Number: 1051212169408
Date of advice: 13 April 2017
Ruling
Subject: Sovereign Immunity
Question 1
Is the non-resident entity immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments as listed in the relevant facts and circumstances of this Ruling?
Answer
Yes.
Question 2
Is the non-resident entity immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its future investments in Australia when made within the parameters contained in the relevant facts and circumstances of this Ruling?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The scheme that is the subject of this Ruling is described below.
1. The non-resident entity is a sovereign wealth fund and was established by the Decree of the President of the foreign country.
2. The main goal of the establishment of the non-resident entity is to accumulate and efficiently manage the foreign country's revenues.
3. The non-resident entity and its assets are wholly owned by the foreign country.
4. In accordance with certain Articles of the foreign country's Statute, the non-resident entity is an extra-budgetary state institution. The non-resident entity is a legal entity and has a number of accounts at banking institutions. The non-resident entity has a seal with the foreign country's State Emblem engraved on it, as well as an appropriate stamp and letterheads.
5. The main responsibility of the non-resident entity is to ensure collection and effective management of foreign currency and other assets that are generated from the implementation of agreements signed, as well as its own activities, in the interest of citizens of the foreign country and their future generations.
6. The non-resident entity has investments in Australian companies.
Management and Control of non-resident entity
7. In accordance with Articles of the foreign country's Statute, the non-resident entity is accountable to the President of the foreign country.
8. The non-resident entity's assets are utilised in accordance with the main directions (program) approved by the President of the foreign country.
9. The Board exercises general control over accumulation and spending of the non-resident entity's assets.
10. Members of the Board are approved by the President of the foreign country and are comprised of representatives of relevant state bodies and public organisations, as well as of other persons.
11. Every year the draft budget of the non-resident entity, having been prepared in coordination and on a consistent basis with the preparation of the draft State Budget for the foreign country, shall be submitted by the Executive Director of the foreign country to the Board, who in turn, submits it to the President of the foreign country for consideration.
12. Final coordination of the non-resident entity's budget with the State Budget shall take place after both documents comprising draft consolidated government revenues and expenditures have been considered by the President of the foreign country preceding submission of the draft State Budget submission to the Parliament.
Capital/Money Contributions into the non-resident entity
13. The non-resident entity's revenue sources are mainly comprised of the revenues generated from implementation of their agreements in the foreign country, as well as other agreements with state bodies and investors.
14. The non-resident entity receives ongoing contributions from a number of different sources.
Use of non-resident entity assets
15. Utilisation of the non-resident entity's assets shall be carried out in accordance with the program to be approved each year through the President of the foreign country.
16. The non-resident entity's assets may be used for solving the most important nationwide problems, and for construction and reconstruction of infrastructure facilities, for the purpose of the country's socio-economic progress.
17. The non-resident entity's assets may neither be used for lending to government bodies, public and non-public enterprises (organisations), nor as collateral for debts (commitments, guarantees) or other liabilities of any entity under jurisdiction of the foreign country.
18. The non-resident entity is not in the business of money lending.
Re-establishment and Liquidation of the non-resident entity
19. Re-establishment and liquidation of the non-resident entity shall be carried out by decree by the President of the foreign country under Articles within the Regulations.
20. On liquidation or re-establishment of the non-resident entity under Articles within the Regulations, any remaining moneys and/or assets will remain assets of the government of the foreign country.
Investments
21. The non-resident entity's investment portfolio is managed in accordance with the guidelines approved by the President of the foreign country. These guidelines are set out in the rule document of the non-resident entity.
22. The guidelines set the general principles of the non-resident entity's asset management framework.
23. An Investment Policy is also produced and approved annually by the President of the foreign country. The Investment Policy defines the objectives, forecasted size, currency composition, strategic asset allocation, benchmarks and risk limits for non-resident entity's investment portfolio.
24. All investments are held through a global custodian. An Australian banking institution is appointed as the Australian custodian. All assets are held by the bank in Australia to the order of the global custodian.
25. The non-resident entity's portfolio is predominantly allocated to assets denominated in different foreign currencies.
26. The non-resident entity's investment portfolio is managed by external managers. Benefits brought about by the use of external managers include market expertise, specific industry experience and regional presence adding value to the investment portfolio.
27. The Investment Policy of the external managers involved in the management of the non-resident entity's assets is reflected in their respective agreements signed between the non-resident entity and the external manager.
28. The non-resident entity's externally managed equity portfolio is rebalanced quarterly to track the World Index, including constituent weights of Australian investments. Its holding of Australian investments reflects the same proportion that the Australian investment form part of the World Index.
29. The non-resident entity holds investments in Australian companies as listed in Appendix 1.
30. The Australian investments currently held by the non-resident entity have the following characteristics:
(a) Investments listed on the Australian Securities Exchange (ASX)
(b) The non-resident entity hold less than 10% of the total investment on issue of each Australian company
(c) The non-resident entity has no involvement in the day to day management of the business of any of the Australian companies
(d) The non-resident entity has no right to appoint a director to the Board of Directors of any issuing Australian company
(e) The non-resident entity has no right to representation on any investor representative or advisory committee (or similar) of any issuing Australian company
(f) The non-resident entity has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the interest held, and
(g) The non-resident entity only holds rights to vote in proportion to its interest in the Australian company.
Future investments
31. The non-resident entity will invest directly in Australian investments in the future subject to the following parameters:
(a) All investments will be listed on the ASX
(b) The non-resident entity will acquire less than 10% of the total investments on issue of each Australian company
(c) The non-resident entity will have no involvement in the day to day management of the business of any of the Australian companies
(d) The non-resident entity will not acquire the right to appoint a director to the Board of Directors of any issuing Australian company
(e) The non-resident entity will not acquire the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian company
(f) The non-resident entity will have no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the interest held, and
(g) The non-resident entity will only have rights to vote in proportion to its interest in the Australian company.
Appendix 1:
32. List of non-resident entity's investments in Australian companies
Reasons for Decision
Question 1
Is the non-resident entity immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments as listed in the relevant facts and circumstances of this Ruling?
Summary
The non-resident entity is immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments in Australia as listed in Appendix 1.
Detailed reasoning
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 / Congreso del Partido 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 monies invested are and will remain government monies, 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
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 non-resident entity is an agency of the foreign country established by a decree of the President of the foreign country.
The management and control of the non-resident entity is subject to presidential decrees and it is controlled by a Board whose members are approved by the President of the foreign country and is comprised of representatives of relevant state bodies and public organisations, as well as of other persons.
Further, the utilisation of non-resident entity's assets shall be carried out in accordance with the program to be approved each year through the President of the foreign country.
The non-resident entity's assets may be used for solving the most important nationwide problems, and for construction and reconstruction of strategically significant infrastructure facilities, for the purpose of the foreign country's socio-economic progress.
The non-resident entity's assets may neither be used for lending to government bodies, public and non-public enterprises (organisations), nor as collateral for debts (commitments, guarantees) or other liabilities of any entity under jurisdiction of the foreign country. These all indicate that the non-resident entity is a function of government.
Therefore, the non-resident entity satisfies the condition that the person making the investment (and therefore deriving the income) is a foreign government or agency of a foreign government.
Condition 2 - that the monies invested are and will remain government monies
The non-resident entity's revenue sources are mainly comprised of the revenues generated from implementation of the agreements of the foreign country and other authorised state bodies and investors.
These funds are used in the interest of citizens of the foreign country and their future generations. The non-resident entity's assets may be used for solving the most important nationwide problems, and for construction and reconstruction of strategically significant infrastructure facilities, for the purpose of the foreign country's socio-economic progress.
On liquidation or re-establishment of the non-resident entity under Articles within the Regulations, any remaining monies and/or assets will remain assets of the government of the foreign country.
For the above reasons, the monies invested by the non-resident entity and the returns received from those investments are considered to be and will remain government monies. Accordingly, this condition is satisfied.
Condition 3 - that the income or gain is being derived from a non-commercial activity
Income derived by a foreign government or by any other body exercising governmental functions from investments is generally not considered to be income derived from a commercial operation or activity.
In determining whether an investment constitutes a non-commercial activity, it is necessary to consider the nature of the investment and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of any entity related to the investment.
As a guide, a commercial transaction is generally considered to be 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. A passive investment is more likely to be considered a non-commercial transaction.
In relationship to the ownership of investments in a company or other similar interests, there would be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment.
In ATO Interpretative Decision ATOID 2002/45 Sovereign Immunity, a holding of less than 10% is generally considered to be indicative of a passive investment.
The non-resident entity holds Australian investments. All Australian investments are held through a global custodian with an Australian Banking institution appointed as the Australia Custodian.
These investments are part of the non-resident entity's externally managed portfolio which is rebalanced quarterly to track the World Index.
The non-resident entity holds Australian investments. These investments have the following characteristics:
(a) They are investments listed on the ASX
(b) The non-resident entity hold less than 10% of the total investments on issue of each Australian company
(c) The non-resident entity has no involvement in the day to day management of the business of any of the Australian companies
(d) The non-resident entity has no right to appoint a director to the Board of Directors of any issuing Australian company
(e) The non-resident entity has not right to representation on any investor representative or advisory committee (or similar) of any issuing Australian company
(f) The non-resident entity has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the interest held, and
(g) The non-resident entity only holds rights to vote in proportion to its interest in the Australian company.
Based on the scheme as described in this ruling, it is considered that the non-resident entity's investments in Australia and the quarterly re-balancing of the investments to track the World Index, results that the income being derived by the non-resident entity's investment in Australia is from a non-commercial activity.
Therefore, it is considered that this condition is satisfied.
Conclusion
The non-resident entity is immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investments as the three conditions for exemption listed above apply.
Question 2
Is the non-resident entity immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its future investments in Australia when made within the parameters contained in the relevant facts and circumstances of this Ruling?
Summary
The non-resident entity will be immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its future investments in Australia if the parameters contained in the relevant facts and circumstances are followed.
Detailed reasoning
As stated in Condition 3 above, income derived by a foreign government or by any other body exercising governmental functions from investments is generally not considered to be income derived from a commercial operation or activity.
In determining whether an investment constitutes a non-commercial activity, it is necessary to consider the nature of the investment and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of any entity related to the investment.
The non-resident entity will make further investments in Australia. These investments are subject to the following parameters:
(a) All investments will be listed on the ASX
(b) The non-resident entity will acquire less than 10% of the total investments on issue of each Australian company
(c) The non-resident entity will have no involvements in the day to day management of the business of any of the Australian companies
(d) The non-resident entity will not acquire the right to appoint a director to the Board of Directors of any issuing Australian company
(e) The non-resident entity will not acquire the right to representation on any investor representative or advisory committees (or similar) of any issuing Australian company
(f) The non-resident entity will have no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the interest held, and
(g) The non-resident entity will only have rights to vote in proportion to its interest in the Australian company.
The parameters given above as to the non-resident entity's future investments into Australia demonstrate they will be passive investments and therefore satisfy the requirement of being a non-commercial activity.
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