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Ruling

Subject: Sovereign immunity and international agreement

Question

Is the foreign country central bank exempt from income tax including withholding taxes on interest, dividend and sundry other income derived in Australia?

Answer

Yes. The foreign country central bank is exempt from income tax including withholding taxes on interest, dividend and sundry other income derived in Australia.

This ruling applies for the following periods:

1 July 2012 to 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The foreign country central bank is created by legislation

Relevant legislative provisions

Taxation Administration Act 1953 Subsection 15-15(2)

Reasons for decision

Exemption for interest paid to banks

The exemption for interest paid to banks will apply to interest derived in the course of performing central banking functions but will not extend to interest derived by a bank from the conduct of a trade or business. Accordingly as the foreign country central bank is carrying out central banking functions set out by law, it is therefore is exempt from interest withholding tax on its interest income derived in Australia in accordance with Article 11(3) of the Convention between the Government of Australia and the foreign country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income 

Sovereign immunity

As the Convention does not have a similar article in respect of dividends, the question of an exemption from dividend withholding tax is addressed by the common law principle of sovereign immunity.

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 bank from the performance of central banking functions within Australia is exempt from Australian tax. An activity undertaken by a foreign bank will generally be accepted as the performance of central banking 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 bank 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 sundry other 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 central bank 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 these three conditions are satisfied, then the dividend income will not be subject to Australian income taxes, including withholding taxes.

Condition 1

That the person making the investment (and therefore deriving the income) is a foreign central bank.

The foreign country central bank has provided evidence in its annual reports and its legislation that it is a 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 country central bank has provided in its legislation that it is responsible for the moneys invested and the moneys will remain government moneys. It is responsible for the control and management of the moneys according to law.

Condition 3

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

In accordance with the facts provided, the foreign country'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 withholding tax is available.