Edited version of private ruling

Authorisation Number: 1011773322729

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Ruling

Subject: Sovereign immunity

Question

Is the taxpayer eligible for exemption from income tax, including withholding tax imposed under subsections 128B(3) and (4) of the Income Tax Assessment Act 1936 (ITAA 1936), under the common law principle of sovereign immunity?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2011

Relevant facts

The taxpayer is a sovereign wealth fund of a foreign government.

The taxpayer is responsible for investing part of the foreign government's surplus financial resources through a globally diversified investment strategy.

The taxpayer is the beneficial owner of the assets under custody and is not engaged in commercial activities in Australia, nor is it engaged in commercial activities anywhere else in the world.

The foreign government issued a law, which stipulates the following:

· The taxpayer has a separate legal identity;

· The taxpayer will invest funds allocated by the foreign government and aim to diversify and maintain the invested funds;

· The taxpayer will have a board of directors; and

· The taxpayer and the companies established by it shall be exempt from all local taxes and duties.

Assumptions

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B.

Income Tax Assessment Act 1997 section 6-1.

Reasons for decision

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.

An activity undertaken by a foreign government will generally be accepted as the performance of governmental functions provided that the agencies are owned and controlled by the government and do not engage in ordinary commercial activities. 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 where it was held that activities of a trading, commercial or other private law character were not governmental functions.

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. However, as a guide, a commercial activity is generally 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.

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. Accordingly, provided the funds used to make such investments are and remain government moneys, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity.

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. 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 a particular case, to establish that sovereign immunity applies to exempt dividend and interest income from withholding tax, it is necessary to establish the following:

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

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

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

If these three conditions are satisfied, then the dividend and interest income will not be subject to Australian income or withholding taxes.

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 taxpayer has provided evidence in its legislation that it is a foreign government controlled investment fund accumulated to invest in diversified investments to ensure growth in accordance with law and that it is the beneficial owner of the assets and therefore it is beneficially entitled to the income.

Therefore, condition 1 is satisfied.

Condition 2

That the monies being invested are and will remain government monies.

The taxpayer has provided in its legislation that the monies invested are and will remain government monies.

Therefore, condition 2 is satisfied.

Condition 3

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

The taxpayer has provided evidence that their investments are passive in nature and it is not engaged in commercial activities in Australia, nor is it engaged in commercial activities anywhere else in the world.

Therefore, condition 3 is satisfied.

Conclusion

The three conditions are satisfied. The taxpayer is exercising government functions and is not engaged in commercial activities and the monies will remain in governmental control.

Therefore, the interest income, dividend income, rental income and trust distributions and any other income derived from passive investments within Australia by the taxpayer is exempt from Australian tax under the common law principle of sovereign immunity.