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Authorisation Number: 1051294919095

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Date of advice: 26 October 2017

Ruling

Subject: Doctrine of sovereign immunity

Question

Will the entity be immune from income and withholding taxes on income derived from its Australian investments under the common law doctrine of sovereign immunity?

Answer

Yes

Relevant facts and circumstances

The entity was incorporated by the agency of government of the foreign country pursuant to foreign government law to make and acquire investments in commercial and real estate projects for the benefit of the government of the foreign country. The entity is wholly owned, capitalised and funded by agency of government of the foreign country.

The entity’s Australian investment consists of a unitholding of less than 10% of the total units on issue in a unit trust. The entity is not represented on the board of directors of the trustee and/or the responsible entity of unit trust. The entity will be earning income in the form of trust distributions from its Australian investment.

Reasons for decision

Sovereign immunity background

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: The person making the investment (and therefore deriving the income) is a foreign government or agency of a foreign government

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:

a) an independent sovereign state, or

b) a separate territory (whether or not it is self-governing) that is not part of an independent sovereign state.

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:

a) is an agency or instrumentality of the foreign State, and

b) is not a department or organ of the executive government of the foreign State.

In view of the facts provided, it is considered that the agency it is a foreign state or a separate entity of a foreign state.

Condition 2: The moneys being invested are and will remain government moneys

In view of the facts provided, it is considered that the moneys being invested by the agency in the scheme are and will remain government moneys.

Condition 3: The income is being derived from a 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.

In ATO ID 2002/45, the Commissioner states that:

When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature….. A portfolio holding in a company (i.e., a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax.

In determining whether the entity’s Australian investment constitutes non-commercial activity, it is necessary to consider the nature of the investment. The relevant factors to consider include:

● level of direct and indirect involvement (or potential involvement) that the entity will have in the affairs of the business;

● the size and type of investment; and

● timeframe of the investment.

In view of the facts provided, it is considered that the Australian investment would be of a non-commercial in nature.

Conclusion

As the three conditions have been satisfied, the Commissioner will not impose liability to income tax and withholding tax on the entity with respect to income derived from its Australian investments.

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