Edited version of private ruling

Authorisation Number: 1011790991904

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Ruling

Subject: Sovereign immunity

Question

Is the Fund eligible for exemption from withholding tax on interest and/or dividend income derived from the investments it made in Australia under the international law doctrine of sovereign immunity for the income years 2011 to 2016?

Answer

Yes

This ruling applies for the following periods:

1 January 2011 to 31 December 2016

The scheme commences on:

1 January 2011

Relevant facts and circumstances

The Fund, in which the Government has 100% ownership interest, was created in accordance with state laws.

The Fund was established to support the stability of social and economic development of the state, accumulate financial assets for future generations and reduce its economic dependence on the global commodity markets.

The sources of the Fund include state taxes and investment income from the Fund.

The Central Bank is engaged for the asset management of the Fund and the rules for the investment operations of the Fund are designed in accordance with state laws.

The Fund currently has investments in equities and fixed income instruments in Australia. All equity investments are less than 10% of the equity interest in the relevant entities.

Documents that provide details about the Fund have been received.

Reasons for decision

Summary

The Fund is eligible for exemption from withholding tax on interest and/or dividend income derived from the investments it made in Australia under the international law doctrine of sovereign immunity for the income years 2011 to 2016 because the Fund is a sovereign fund owned by a foreign government, the moneys being invested are and will remain government moneys and the income is derived from non-commercial activities.

Detailed reasoning

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 it is functions of the government, 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 Playa Largo (Owners of Cargo lateley laden on Board) v I Congreso del Partido (Owners) (I Congreso del Partido) [1983] 1 AC 244; [1981] 2 All ER 1064; [1981] 3 WLR 328; [1981] 2 Lloyd's Rep 367, which 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% 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 summary, 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 moneys being invested are and will remain government moneys; and

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

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

In this case, the Commissioner considers that the above conditions have been satisfied for the following reasons:

1) 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 rulee is a sovereign fund owned by a foreign government, namely the Government.

2) Condition 2 - that the moneys being invested are and will remain government moneys

The Government has 100% ownership interest in the Fund and is the beneficiary of the income derived from the Fund's investments. 

3) Condition 3 - that the income is being derived from a non-commercial activity.

It is considered that the Fund derives its income from non-commercial activities, with its investments in equity and debt interests only, where the former are portfolio holdings which do not exceed 10% interest in the relevant entities.

Accordingly, an exemption from interest and dividend withholding tax under the international law doctrine of sovereign immunity is available to the Fund.