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Subject: Sovereign immunity

Question

Is the foreign country central bank exempt from income tax on its interest and/or dividend income derived from Australia under the principle of sovereign immunity?

Answer

Yes. The foreign country central bank is exempt from income tax on its interest and/or dividend income derived from Australia under the principle of sovereign immunity.

This ruling applies for the following periods:

1 July 2011 to 30 June 2016

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The foreign country central bank was established by legislation and carries out all the functions of a central bank. Evidence is provided by the applicant and on its own website.

Relevant legislative provisions

Taxation Administration Act 1953 Section 15-5(2)

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 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 (that is, 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 sundry income from income tax including 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.

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 foreign government entity is a government controlled central bank and that it is the beneficial owner of the assets and therefore it is beneficially entitled to the income.

Condition 2

That the moneys being invested are and will remain government moneys

The foreign central bank has established that the moneys invested are and will remain government moneys.

Condition 3

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

The foreign government central bank's investments in Australia are considered to be of a passive and non-commercial nature.

Accordingly, an exemption under the principles of sovereign immunity for income tax including dividend and interest withholding tax is available.