Edited version of your private ruling

Authorisation Number: 1012520234940

Ruling

Subject: Sovereign Immunity

Question

Is the foreign government entity entitled to an exemption from Australian income tax (including withholding tax) under the principle of sovereign immunity?

Answer

Yes.

This ruling applies for the following periods:

1 April 2013 to 31 March 2016

The scheme commences on:

1 April 2013

Relevant facts and circumstances

The foreign government entity was created by legislation. The Board of the foreign government entity is an independent statutory corporation which operates under the stewardship of the foreign government Department.

Relevant legislative provisions

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

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

Reasons for decision

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

Certain income derived from within Australia by foreign governments or agencies of foreign governments from the performance of government functions within Australia will be exempt from Australian tax under the common law doctrine of sovereign immunity. Activities undertaken by agencies of a foreign government will generally be accepted as the performance of governmental functions provided that the foreign government 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.

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 to determine if sovereign immunity applies:

· 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 how each of these requirements, in turn, applies in this case.

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

The Company, itself, is not a foreign government. Therefore, it will be necessary to consider whether it is an 'agency of a foreign government'.

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

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

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

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

In the context of sovereign immunity, an entity that 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 is not a private body established exclusively for private profit.

The foreign government entity is an independent statutory corporation established by legislation enacted by the foreign government under the stewardship of the foreign government Department. The purpose of the foreign government entity is to provide compensation to former members of certain defined benefit pension arrangements in the event that such arrangement becomes insolvent.

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

The legislation provides that 'public funds' include 'any other funds generated by approved activities or falling within the stewardship of the foreign government entity.' For this reason the funds used by the foreign government entity to invest in the fund are, and will remain, government moneys.

3. That the income and capital gains are being derived from a non-commercial activity.

The question of whether an operation or activity is commercial in nature will depend on the facts of each particular case. As a guide, 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 non-commercial activity and any dividends received from such a holding would be exempt from tax (provided the other requirements of sovereign immunity are also satisfied).

In this case, the foreign government entity will have a holding of units within a fund of more than 10 per cent but this is capped at 20%.

However, it is the Commissioner's view that the holding of a portfolio interest alone is not determinative of whether an activity is passive or commercial in nature. As stated above, the holding of a passive investment would '…generally be accepted as non-commercial activity' (emphasis added).

Therefore, all the facts of each particular case are required to be considered in deciding whether an activity is passive or commercial. Importantly, this includes determining whether the government or its foreign government agency has a sufficient level of influence and control over the company it has invested in, such that it can be said that it is involved in carrying on a commercial activity.

The foreign government entity does not have the power to appoint a director, hence it does not have the ability to influence or control the business operations of the fund. Accordingly the Commissioner accepts that the investment in the fund is a passive, non-commercial investment.

As a result, as all three conditions are satisfied the Commissioner considers the income and capital gains derived by the foreign government entity from its passive investment in Australia is exempt from income tax, including withholding tax, under the common law doctrine of sovereign immunity.