Edited version of your written advice

Authorisation Number: 1051415631389

Date of advice: 20 August 2018

Ruling

Subject: Sovereign Immunity

Question

Is the entity immune from income and withholding taxes on:

● interest income derived from loans to an Australian resident company and an Australian resident unit trust

● dividend income derived as a shareholder in the Australian resident company, and

● distributions received as a unitholder in the Australian resident unit trust

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

● The entity was established by a foreign government in accordance with a statute to perform governmental functions.

● The entity was established with moneys of the foreign government.

● The entity receives money from the foreign government to invest on its behalf.

● The entity is managed and controlled in accordance with foreign government laws.

● On liquidation of the entity, any remaining moneys and/or assets will remain assets of the foreign government.

● The entity derives interest income from loans to an Australian resident company and an Australian resident unit trust, dividend income from holding shares in the Australian resident company and distributions received from holding units in the Australian resident unit trust.

● The loans provided by the entity do not enable the entity to obtain any additional shares or units in the Australian resident company and trust and do not give the entity influence in relation to day-to-day operations or control of the Australian resident entities.

● As the holder of the shares and units the entity has certain rights, which could in some circumstances give actual or potential influence in respect of the financial, operating and policy decisions of the Australian resident company and trust.

● The entity has undertaken to the Australian resident company and unit trust that it will not exercise these rights.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1997 Section 4-1

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

The entity was established by a foreign government in accordance with a statute to perform governmental functions. Therefore, the person making the investment and 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 entity was established with moneys of the foreign government. The entity receives money from the foreign government to invest on its behalf. The entity is managed and controlled in accordance with foreign government laws. On liquidation of the entity, remaining moneys invested are, and will remain, government moneys. Therefore, the moneys invested are and will remain the moneys of the foreign government.

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 or investments in equities is generally not considered to be income derived from a commercial operation or activity.

However there may be instances where the extent of the relevant investment, and the actual or potential influence it provides, may give rise to questions as to whether it constitutes a passive investment or commercial activity.

On the facts of this case the entity does not influence with respect to the management and operations of the Australian resident company and unit trust, in which it has invested, and it is considered that the investments are non-commercial activities.

Conclusion

As the three conditions for immunity under the doctrine of sovereign immunity are satisfied, the entity is immune from income and withholding taxes on the interest, dividends and trust distributions it derives from its holdings in, and loans to, the Australian resident company and unit trust.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).