Edited version of private ruling

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Ruling

Subject: Sovereign Immunity

Question 1

Will a non resident special purpose vehicle (X) be exempt from Australian income tax, including withholding tax, under the common law principle of sovereign immunity in respect of income, including interest and dividends, or gains derived as a result of the holding and/or disposal of shares and interest bearing debt issued by an Australian resident corporation (Aus Co) where it holds legal and beneficial title to 10% or less of the total shares and interest bearing debt issued by Aus Co?

Answer

No. X is not entitled to exemption from Australian income tax, including withholding tax, on its income in respect of the Investment, under the common law principle of sovereign immunity.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts

1. Entity X was established under foreign law solely as a special purpose vehicle that is wholly owned, managed and controlled by a foreign government and through which it invests its funds.

2. X was incorporated for the sole purpose of holding the investment in Aus Co.

3. Aus Co is an Australian resident corporation formed under the Corporations Act 2001 and is the head company of an Australian tax consolidated group.

4. X has acquired less than 10% of A and B shares in Aus Co, where A shares carry an entitlement to vote only on the election of directors and have very limited economic rights and B shares carry rights to vote on all other matters and effectively have full economic rights

Relevant Legislative provisions

Income Tax Assessment Act 1997 Subsection 995-1(1).

Detailed reasoning

5. Certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax.

6. An activity undertaken by a foreign Government Agency will generally be accepted as the performance of governmental functions provided that it is functions of government, provided that the agency is owned and controlled by the government and does not engage in commercial activities.

7. 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. Whether an operation or activity is commercial in nature will depend on the facts of each particular case.

8. In relation to a holding of shares in a company, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or the carrying on of a business, but this would depend on the particular circumstances.

9. The current practice of the ATO is to provide a tax exemption under the common law doctrine of sovereign immunity where the conditions under ATO Interpretative Decision ATO ID 2002/45 (ATO ID) are satisfied. These conditions are:

· that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;

· that the moneys being invested are and will remain government moneys; and

· that the income is being derived from a non-commercial activity.

Is X an agency of a foreign government?

10. An 'agency of a foreign government' is not defined in the ATO ID. However, the definition of a 'foreign government agency' in the Income Tax Assessment Act 1997 (ITAA 1997) is an appropriate definition in the context of the ATO ID.

11. Subsection 995-1(1) of the ITAA 1997 provides that a foreign government agency is:

· the government of a foreign country or part of a foreign country;

· the authority of the government of a foreign country; or

· the authority of the government of part of a foreign country.

12. Since X itself is not a 'foreign government agency', it is necessary to consider whether it is an 'authority' of the foreign government or part of a foreign government.

13. In cases such as the High Court decision of SGH Ltd v Commissioner of Taxation (2002) ATC 4366, the courts have held that if a corporation is discharging governmental functions for the State, then the corporation is the State. On the other hand, if the intention is for the corporation to perform its functions independently of, and not as an instrument of, the State, the corporation is not the State.

14. Although this principle is separate to the meaning of 'authority' in the definition of 'foreign government agency' in subsection 995-1(1) of the ITAA 1997, it does guide the ATO practice to include corporations that carry on the governmental functions of a foreign government as part of the foreign government for the purposes of applying sovereign immunity.

15. The investment activity of X (acting on the authority of the Minister) is an activity that is the function of the government and it is accepted that X is an 'authority' of the foreign government.

Are the moneys being invested government moneys and will they remain government moneys?

16. To be 'government moneys', the moneys must be available as part of the general funds of the foreign government and used for general government functions as required.

17. The moneys being invested by X are considered government moneys and X satisfies the second requirement in the ATO ID.

Is the income derived from non-commercial activity?

18. The ATO ID states that the question of whether an operation or activity is commercial in nature will depend on the facts of each particular case.

19. As a guide, the ATO ID states that a portfolio holding in a company (that is, a holding of 10 per cent or less of the equity in a company) will generally be accepted as non-commercial activity and any dividends received from such a holding would be exempt from tax (provided the other requirements of sovereign immunity are also satisfied).

20. However, as stated by the ATO ID, all the particular facts and circumstances need to be considered to determine whether an investment is a non-commercial activity. This includes determining whether the foreign government agency has a sufficient level of influence over the company it has invested in, such that it can be said that it is involved in carrying on a commercial activity.

21. In this case it is considered that X's investment is a commercial activity for the purposes of applying the test of sovereign immunity in the ATO ID and not merely a passive investment.

22. Therefore, X fails the third requirement of sovereign immunity in the ATO ID.