Edited version of your private ruling

Authorisation Number: 1012462491301

Ruling

Subject: Sovereign immunity - Withholding tax exemption

Question 1

Is the foreign government entity entitled to an exemption from liability to dividend withholding tax under the common law principle of sovereign immunity in respect of its Australian portfolio investments (i.e. investments in which the foreign government entity holds less than 10% of the total interests) at a particular point in time?

Answer

Yes.

This ruling applies for the following period:

Three income years

The scheme commences on:

During the 2013 income year

Relevant facts and circumstances

1. The foreign government entity has applied for an exemption from Australian withholding tax on its dividend income, based on the principle of sovereign immunity.

2. In support of its private ruling application, the foreign government entity has supplied the following documents:

· The legislation by which the foreign government entity was established (the Law).

· A table containing details of the Australian portfolio investment of the foreign government entity at a particular point in time;

· A table containing details of the dividends received by the foreign government entity in the 2012 income year in respect of the abovementioned portfolio investments; and

· Diagrams depicting the flow of funds for equity investments and dividends of the foreign government entity.

The foreign government entity

3. In accordance with the Law, the foreign government entity shall, subject to instructions of the foreign government, be responsible for the development and implementation of monetary policy, and for safeguarding the stability of the financial system.

4. As per the Law, the objective of the monetary policy is to maintain the stability of the currency conducive to the growth and development of the economy.

5. The Law further provides other specific powers of the foreign government entity as assigned by the foreign government, including without limitation, to manage and invest with the moneys of the foreign government.

6. The foreign government entity obtains its operational costs out of the treasury of the foreign government, according to the budgetary legislation of the foreign government.

7. The Law provides that the foreign government funds the foreign government entity and the funds remain as the money of the foreign government.

8. In accordance with the Law, the foreign government entity shall have one chief executive officer and a certain number of deputy executive officers. The chief executive officer of the foreign government entity shall be nominated by the foreign government. The Law also provides that foreign government appoints and removes the deputy executive officers of the foreign government entity.

9. The foreign government entity asserts that all income or gains from their investments belong to the foreign government, and will form part of the balance of payment of the foreign government.

10. The foreign government entity states that, as an integral part of the foreign government, the foreign government entity is the sole beneficial owner of all the assets under its custody. The money being invested by the foreign government entity is and will remain government money.

Portfolio investment activities of the foreign government entity

11. The foreign government entity states that in performing its official responsibilities it invests a portion of the foreign government's moneys in investments made in Australia or with Australian residents, including without limitation equities in Australian companies. The investments and transactions are made by the foreign government entity in the exercise of its official function to manage the foreign government's moneys and do not relate to any commercial activity. Other than these investments, the foreign government entity has no other investments in Australia.

12. The foreign government entity asserts that it is not represented on the board of directors of the companies in which it has invested, and that it does not exert influence on the business operations of those companies, other than the exercise of voting rights in proportion to its shareholding.

13. The foreign government entity asserts that any income from its investments in Australia will be included in the treasury of the foreign government, and be used to fund and support general government functions.

14. The foreign government entity is seeking to claim an exemption from liability to withholding tax in respect of its portfolio investments, as outlined in the table containing details of the Australian portfolio investments of the foreign government entity at a particular point in time. Therefore, only these portfolio investments are considered for the purpose of this ruling.

Relevant legislative provisions

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

Reasons for decision

Question 1

Is the foreign government entity entitled to an exemption from liability to dividend withholding tax under the common law principle of sovereign immunity in respect of its Australian portfolio investments (that is, investments in which the foreign government entity holds less than 10% of the total interests) at a particular point in time?

Summary

The foreign government entity is entitled to an exemption from liability to dividend withholding tax under the common law principle of sovereign immunity in respect of its Australian portfolio investments (that is, investments in which the foreign government entity holds less than 10% of the total interests) at a particular point in time.

Detailed reasoning

Pursuant to ATO interpretative Decision ATO ID 2002/45, certain income derived from within Australia by foreign government is exempt from Australian tax under the international law doctrine of sovereign immunity.

While the taxation legislation itself does not provide an exemption specifically for foreign governments, the Australian Government recognizes the international law doctrine of sovereign immunity. In recognition of the doctrine, the practice is to refrain from seeking to tax gains from non-commercial activities of foreign governments. As such, 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 agency will generally be accepted as the performance of governmental functions provided that 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 British House of Lords in the case / 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 (i.e. a holding of 10 per cent 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.

To establish that sovereign immunity applies to exempt dividend and interest income from 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.

If these three conditions are satisfied, then the dividend and interest income will not be subject to Australian income or withholding taxes.

Condition 1

Is the person making the investment (and therefore deriving the income) a foreign government or an agency of a foreign government?

As the foreign government entity is not a foreign government, it is required to be an agency of a foreign government in order to fulfill Condition 1.

While the term 'agency of a foreign government' is not defined, subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a 'foreign government agency' is:

(a) The government of a foreign country or of part of a foreign country; or

(b) An authority of the government of a foreign country; or

(c) An authority of the government of part of a foreign country.

In the context of sovereign immunity, it is considered that an entity which 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. This is consistent with the judicial decisions in cases such as the High Court decisions in Committee of Direction of Fruit Marketing v. Australian Postal Commission (1980) 144 CLR 577, Commissioner of Taxation v Bank of Western Australia; State Bank of New South Wales (1995) 96 ATC 4009 and SGH Ltd v Commissioner of Taxation (2002) ATC 4366, which considered the term 'authority' in the context of the State. The courts held that if a corporation is discharging governmental functions for the State, then the corporation is the State. On the other hand, if the intention is for the corporation to perform its functions independently of, and not as an instrument of the State, the corporation is not the State.

The Law provides that the foreign government entity shall be responsible for the development and implementation of monetary policy, and for safeguarding the stability of the financial system, subject to instructions of the foreign government.

The Law then states that the objective of the monetary policy is to maintain the stability of the currency conducive to the growth and development of the economy.

In accordance with the Law, the foreign government entity shall have one chief executive officer and a certain number of deputy executive officers. The chief executive officer of the foreign government entity shall be nominated by the foreign government. The Law also provides that foreign government appoints and removes the deputy executive officers of the foreign government entity.

Based on the facts, it is considered that the foreign government entity, which was established by the foreign government, is an 'authority' as it is performing a function in the interests of the public.

Accordingly, the foreign government entity is an 'agency of a foreign government'.

Condition 2

Are the moneys being invested government moneys and will they remain government moneys?

The diagrams depicting the flow of funds for each type of investments, provided by the foreign government entity, indicate that funds in relation to equity investments of the foreign government entity originate from and will ultimately return to the foreign government entity.

The Law states that the foreign government funds the foreign government entity and the funds remain as the money of the foreign government.

The foreign government entity asserts that all income or gains from the portfolio investments that are the subject of this ruling belong to the foreign government, and will form part of the balance of payment of the foreign government.

It is considered that the money being invested by the foreign government entity is and will remain government money.

Condition 3

Is the income derived from non-commercial activity?

As set out above, 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.

In relation to 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. A portfolio in a company (that is, a holding of 10% or less of the equity in the company) will generally be accepted as a non-commercial activity.

Based on the facts provided, the foreign government entity holds securities in a number of entities, and these holdings do not exceed the 10% portfolio threshold. The foreign government entity has asserted that it is not represented on the board of directors of the companies in which it has invested, and that it does not exert influence on the business operations of those companies, other than the exercise of voting rights in proportion to its shareholding.

Accordingly, the portfolio holdings of the foreign government entity in the aforementioned entities at a particular point in time are accepted as passive and non-commercial in nature.

Conclusion

It is established that:

· The foreign government entity is an agency of a foreign government.

· The moneys being invested by the foreign government entity in relation to its portfolio holdings are and will remain government moneys; and

· The dividend income being derived from the portfolio investments of the foreign government entity is from a non-commercial activity.

In the circumstances, any dividend income derived from the portfolio investments of the foreign government entity at a particular point in time in relation to the aforementioned entities will not be subject to Australian withholding tax.

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