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Edited version of your written advice
Authorisation Number: 1051326540786
Date of advice: 19 March 2018
Ruling
Subject: Sovereign Immunity
Question
Will Entity A be immune from Australian withholding tax on interest received on Australian fixed income securities under the common law doctrine of sovereign immunity?
Answer
Yes.
This ruling applies for the following period:
XXXX to XXXX
The scheme commences on:
XXXX
Relevant facts and circumstances
1. Entity A was established by a foreign government in accordance with a statute to perform governmental functions.
2. Entity A was established with moneys of the foreign government.
3. Entity A receives money from the foreign government to invest on its behalf.
4. Entity A is managed and controlled in accordance with foreign government laws.
5. On liquidation of Entity A, any remaining moneys and/or assets will remain assets of the foreign government.
6. Entity A owns fixed income securities from which it derives Australian sourced interest income.
7. Entity A is not in the business of money lending.
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, the income and/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 was established by a foreign government in accordance with a statute to perform governmental functions. Therefore, 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
Entity A was established with moneys of the foreign government. Entity A receives money from the foreign government to invest on its behalf. Entity A is managed and controlled in accordance with foreign government laws. On liquidation of Entity A, any remaining moneys invested are, and will remain, government moneys. Therefore, the moneys invested are and will remain government moneys.
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 interest bearing investments is generally not considered to be income derived from a commercial operation or activity.
Entity A owns fixed income securities from which it derives Australian sourced interest income. Further, Entity A is not in the business of money lending. Therefore, it is considered that Entity A’s investments in Australian fixed income securities are non-commercial activities.
Conclusion
As the three conditions for immunity under the doctrine of sovereign immunity are satisfied, Entity A will be immune from Australian withholding tax for interest received on Australian fixed income securities.
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