Edited version of your private ruling

Authorisation Number: 1012288121135

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Australian Withholding Tax Exemption - Sovereign Immunity

Question 1

Is the foreign Government Agency entitled to an exemption from liability to interest withholding tax under the common law principle of sovereign immunity in respect of interest derived from debt instruments, provided that the entity is deriving this interest income from passive debt instruments and not from any commercial activity (in particular from the business of money lending)?

Answer

Yes

Question 2

Is the foreign Government Agency entitled to an exemption from liability to dividend withholding tax under the common law principle of sovereign immunity in respect of its passive portfolio investments, in which it holds less than 10% of the total interests?

Answer

Yes

Question 3

Is the foreign Government Agency entitled to an exemption from liability to capital gains tax under the common law principle of sovereign immunity in respect of gains from disposal of passive investments in which it holds less than 10% of the total interests?

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 July 2012

Relevant facts and circumstances

The foreign Government Agency is wholly owned by and reports to the foreign government.

The foreign Government Agency performs functions of government under the government's legislated mandate.

The foreign Government Agency invests in equities, fixed income and deposits in Australia.

The investment mandate from the foreign government states that investments are intended for long-term investments.

The foreign Government Agency has also invested in non-convertible Australian government, corporate and asset backed securities as well as placing AUD denominated deposits with financial institutions.

All investments made by the foreign Government Agency are for income producing purposes only and are not for the purpose of making a profit from buying and selling shares.

The income will not be used for any other purpose than reinvestment or to support the government and foreign Government Agency's functions.

Reasons for decision

While the taxation legislation itself does not provide an exemption specifically for foreign governments, the Australian government recognises the international law doctrine of sovereign immunity.

Certain income derived from within Australia by foreign governments from the performance of government 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.

To establish whether sovereign immunity applies to exempt interest and dividend income from income tax, it is necessary to establish the following (pursuant to ATO ID 2002/45):

· 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

An activity undertaken by a foreign Government Agency will generally be accepted as the performance of governmental functions provided that it is functions of government and provided that the agency is owned and controlled by the government and does not engage in commercial activities.

The foreign Government Agency is a statutory body wholly owned by the foreign government.

The factors outlined in the application demonstrate that the foreign Government Agency will be 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 discussed below.

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

The foreign Government Agency uses its funds to invest in equities, fixed income and deposits in Australia.

All income derived from investment in Australia will be reinvested as part of the mandate to support its own and the government's functions.

The income will not be used for any other purpose than reinvestment or to support the government and its own functions.

Accordingly, moneys that the foreign Government Agency receives from investments in Australia are and will remain government moneys.

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

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.

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 share 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. A portfolio holding in a company (i.e. a total holding of 10 per cent or less of the equity in the company) will generally be accepted as a non-commercial activity (see ATOID 2002/45).

The foreign Government Agency currently invests in securities, fixed income and deposits in Australia and will invest in assets of a similar nature. Furthermore, the funds used to make the investments are and will remain government moneys.

The investment mandate states investments are intended for long-term investments. The types of operations and activities of the foreign Government Agency have been provided and are only for income producing purposes and are not for the purpose of making a profit from buying and selling shares.

Based on the above factors, the investments in the debt and equity instruments will constitute passive investments.

Accordingly, the foreign Government Agency will be exempt from Australian income tax (including capital gains tax) and withholding tax on the income and capital gains from its passive investments under the principle of sovereign immunity.