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Ruling

Subject: Sovereign immunity

Question 1

Is the income derived in Australia by a non-resident company from its debt investment exempt from Australian income and withholding tax under the international law doctrine of sovereign immunity?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 December 2009

Relevant facts and circumstances

The relevant entities

A non-resident company (the Company) was established by a foreign government to hold investments in Australia.

The Company, its immediate holding company and its parent company are all wholly owned by a statutory body corporate established under an enactment of the foreign government to own and administer assets of that foreign government.

Investment in Australia

The Company entered into an arrangement with an Australian resident entity to provide a secured cash advance facility (the Facility) to a group of Australian resident borrowers.

The funds contributed by the Company to the Facility are from the foreign reserves of the foreign government and will remain so for the period that the Company holds the investment.

The Facility will be secured by mortgages over Australian real property, and fixed and floating "all assets" charges granted by the borrowers. The Facility will also be secured by mortgages over the units in the borrowers.

Income derived by the Company from the Facility consists of interest income and fee income (e.g. upfront fees, prepayment fees and extension fees). All income derived from the debt investment will be used to fund and support governmental functions of the foreign government.

No control element or voting rights have been acquired by the Company as a result of the Facility other than rights relating to the protection of its investment.

Other activities and investments

The Company does not engage in commercial activities such as trading of goods and services, buying, selling, bartering and transportation or carrying on a business.

The Company does not hold any other investments at present.

Relevant legislative provisions

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

Reasons for decision

Summary

Income derived in Australia by the Company from its debt investment will be treated as exempt from Australian income and withholding tax under the international law doctrine of sovereign immunity.

Detailed reasoning

While the Australian taxation legislation itself does not provide an exemption specifically for foreign government agencies, the Australian government recognises the international law doctrine of sovereign immunity and will treat as "exempt" certain income derived by foreign governments. In accordance with that doctrine, the Australian government 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 agency will generally be accepted as the performance of governmental functions provided the agency is owned and controlled by the government and does not engage in commercial activities. This approach is consistent with the decision of the 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.

ATO Interpretive Decision ATO ID 2002/45 discusses the conditions that must be satisfied for the doctrine of sovereign immunity to apply to treat interest and dividend income as being exempt from Australian income and withholding taxes. 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.

Condition 1: That the person making the investment (and therefore deriving the income) is a foreign government or agency of a foreign government

The Company, itself, is not a foreign government. Therefore, it will be necessary to consider whether it is an 'agency of a foreign government'.

An 'agency of a foreign government' is not defined in ATO ID 2002/45. However, subsection 995-1(1) of the Income Tax Assessment Act 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.

In the context of sovereign immunity, we consider that an entity that is wholly owned by a foreign government is an 'authority' where that entity is performing a function for the public advantage and executes a function in the public interest and not a private body established exclusively for private profit.

The Company, which is indirectly wholly owned by the body corporate established under an enactment of the foreign government, acts as a special purpose vehicle for investments in Australia in the management of the foreign reserves of the foreign country. The management of the foreign reserves of a country is a function for the public advantage or public interest and is not a function exclusively for private profit. Therefore, the Company acts as an 'authority' of that body corporate. Accordingly, the Company is considered to be an 'agency of a foreign government' and satisfies condition 1 of ATO ID 2002/45.

Condition 2: That the moneys being invested are and will remain government moneys

The funds used by the Company to invest in the Facility are sourced from the foreign reserves of the foreign government and will remain so for the period that the Company holds the investment.

The money is being invested for the purpose of preserving and enhancing the foreign reserves of the foreign country. All income derived from the Facility will be used to fund and support governmental functions of the foreign government.

Accordingly, the moneys being invested by the Company are, and will remain, government moneys.

Condition 3: That the income is being derived from a non-commercial activity

ATO ID 2002/45 states that the question of whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, it provides that commercial activity is generally concerned with the trading of goods and services or the carrying on of a business. In contrast, income from interest bearing investments or investments in equities is generally not considered to be income derived from commercial activities.

The Company has entered into an arrangement with an Australian resident entity to jointly provide the Facility to the borrowers. Income derived by the Company from the Facility will consist of interest and fees. The Company will not acquire any control or voting rights over the borrowing entities in relation to the Facility, other than rights relating to the protection of its investment. It is considered that the Company does not carry on a business nor does it engage in the trading of goods and services.

Consequently, the Company's investment in the Facility will constitute a passive, non-commercial investment.

Conclusion

The three conditions outlined in ATO ID 2002/45 are satisfied. Accordingly, the interest income derived in Australia by the Company in respect of its debt investment will be treated as exempt from Australian income and withholding tax under the common law doctrine of sovereign immunity.