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Ruling
Subject: Sovereign immunity
Question
Is the portfolio interest income derived by the foreign government entity through its bare trustee exempt from withholding tax pursuant to the doctrine of sovereign immunity?
Answer
Yes. The portfolio interest income derived by the foreign government entity through its bare trustee exempt from withholding tax pursuant to the doctrine of sovereign immunity
This ruling applies for the following periods:
2012 to 2015
The scheme commences in:
2012
Relevant facts and circumstances
The policy of the foreign government department is to invest the funds of the government to achieve a return commensurate with the risk and reward profile of the investments. It does not take controlling interest or work with them as business partners. The existing portfolio comprises companies in the banking and other industrial sectors.
Relevant legislative provisions
Section 15-5(2) of the Taxation Administration Act (1953)
Reasons for decision
Certain income derived from within Australia by foreign governments from the performance of governmental functions within Australia will be exempt from Australian tax under the doctrine of sovereign immunity. 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 which held that activities of a trading, commercial or other private law character were not governmental functions.
In order to establish whether sovereign immunity applies to exempt interest income from withholding tax, it is necessary to establish the following conditions required in ATOID 2002/45:
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 being invested are and will remain government moneys; and
3. that the income is being derived from a non commercial activity.
Condition 1 - that the person making the investment (and therefore deriving the income) is a foreign government or agency of a foreign government
The foreign entity has provided evidence which demonstrates that it is exercising governmental functions and is owned and controlled by the foreign government. As such, the entity will constitute an agency of a foreign government subject to satisfaction of the conditions below.
Condition 2 - that the moneys being invested are and will remain government moneys
The foreign entity has provided evidence that the moneys being invested are and will remain government money.
Condition 3 - that the income is being derived from a non-commercial activity
Based on the evidence provided by the foreign entity, it is considered that that income is being derived from a non commercial activity.
Conclusion
Therefore, the interest paid by the payer to the bare trustee for the benefit of the foreign government entity remains government monies and remains in the control of the foreign government entity.
Accordingly, having satisfied conditions one to three above, the foreign entity and its wholly owned subsidiary will qualify for an exemption from Australian interest withholding tax on its interest income derived from the proposed minority investment in the special purpose vehicles proposed to be used to acquire Australian assets under the principle of sovereign immunity.