Edited version of your private ruling

Authorisation Number: 1012462508125

Ruling

Subject: Sovereign immunity and international agreements

Question

Is the foreign government entity entitled to an exemption from liability to income tax under the common law principles of sovereign immunity in respect to distributions from passive investment s in widely held management investment funds or trusts in which the entity holds less than 10% of the total fund?

Answer

Yes

This ruling applies for the following periods:

1 July 2008 to 30 June 2015

The scheme commences on:

1 July 2008

Relevant facts and circumstances

Facts provided by website and list of Australian investments emailed.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Subsection 15-5(2) and

International treaty listed under the Australian Treaty series

Reasons for decision

Issue

Sovereign immunity and an international treaty listed under the Australian Treaty series

Question

Summary

Is foreign government retirement fund a foreign government entity entitled to an exemption from liability to income tax under the common law principles of sovereign immunity in respect to distributions from passive investment s in widely held management investment funds or trusts in which the entity holds less than 10% of the total fund?

Detailed reasoning

Exemption for interest paid to a foreign government entity

The exemption for interest paid to a political or administrative sub-division or a local authority thereof, or by any other body exercising governmental functions will apply. Accordingly as the foreign government retirement fund is exercising governmental functions set out by law, it is therefore is exempt from interest withholding tax on its interest income derived in Australia in accordance with a treaty listed in the Australian Treaty Series

Sovereign immunity

As the Convention and Protocol do not have a similar article in respect of dividends and distributions from managed investment funds generally referred to as sundry other income, the question of an exemption from dividend withholding tax and income tax on sundry other income 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 foreign government entity

The foreign government retirement fund has provided evidence in its annual reports and its legislation that it is a retirement fund 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 government retirement fund 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 government retirement fund'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.