Edited version of your private ruling

Authorisation Number: 1012474764002

Ruling

Subject: Sovereign Immunity

Question

Is the foreign development fund eligible for exemption from income tax, including withholding tax, on income and capital gains derived in Australia from passive investments under the common law doctrine of sovereign immunity?

Answer

Yes.

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The foreign development fund was created by agreement and derives income and capital gains from Australian passive investments.

Relevant legislative provisions

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

Reasons for decision

While the taxation legislation itself does not provide exemption specifically for foreign governments, the Australian government does recognise the common law doctrine of sovereign immunity and will provide exemption on investments of foreign governments and monetary authorities of foreign governments where the moneys being invested are and will remain government moneys (for example, investment of foreign reserve assets) and are invested in passive (that is, non-commercial) type investments. This is usually regarded as meaning investment at interest in traditional instruments such as bonds or a portfolio (that is, a holding of 10% or less of the equity in a company) holding of shares.

Certain income derived from within Australia by foreign governments is exempt from Australian tax under the common law doctrine of sovereign immunity. In accordance with that doctrine, 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 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.

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 (less than 10%) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax.

In summary, and as stated in ATO Interpretative Decision ATO ID 2002/45 (ATO ID 2002/45) in relation to establishing that sovereign immunity applies to exempt certain 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.

Consideration will be given to each of these requirements in turn.

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

In order to determine whether the fund is an agency of a foreign government the answer in each case is to be found by examining the body in question, studying any statute and agreements establishing it and considering its purposes, functions and the degree of governmental control. The foreign development fund is an agency of a foreign government created by agreement between the foreign governments.

2. That the moneys being invested are and will remain government moneys.

The moneys invested belong to the foreign governments.

The foreign government fund has established that the moneys invested are and will remain government moneys.

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

Commercial activities are not precisely defined and are dependent upon the facts and circumstances of each case.

The investments of the foreign government fund in Australia are considered to be of a passive and non-commercial nature.

The income and capital gains are therefore derived from non-commercial activities.

Accordingly, as all three conditions are satisfied, the Commissioner considers the income and capital gains derived by the foreign government fund from passive investments is exempt from income tax, including withholding tax, under the common law doctrine of sovereign immunity.