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Edited version of your written advice
Authorisation Number: 1012810744213
Ruling
Subject: Sovereign Immunity
Question 1
Is Entity A exempt from Australian income and withholding taxes under the doctrine of sovereign immunity for dividends and gains made by it from the disposal of Australian shares where the shares are held as part of its equity portfolio?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commences on:
Year ended 30 June 2015
Relevant facts and circumstances
1. Entity A was established by a foreign government in accordance with a statute.
2. Entity A was established with moneys of the foreign government and continues to receive and pay moneys to the foreign government.
3. Entity A is managed and controlled by the foreign government.
4. Entity A and its assets are wholly-owned by the foreign government.
5. On liquidation of Entity A, any remaining moneys and/or assets will remain assets of the foreign government.
6. Entity A owns shares in Australian companies from which it receives dividends. Entity A will also make gains on the disposal of those shares.
7. Entity A's shareholdings in Australian companies track an index.
8. Each shareholding held by Entity A in each Australian company is less than 10% of the total shares on issue for each company.
9. Entity A is not entitled to and has not appointed a director to the Board of Directors of any of the Australian companies in which it holds shares.
Relevant legislative provisions
N/A
Reasons for decision
For Australian income tax purposes it is accepted that the doctrine of sovereign immunity applies to foreign governments or an agency of a foreign government that engage in governmental functions. 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.
To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or agency of a foreign government from Australian income tax and/or withholding tax, it is necessary to establish the following:
1) that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;
2) that the moneys being invested are and will remain government moneys; and
3) that the income is being derived from a non-commercial activity.
If these three conditions are satisfied, the Australian sourced income and/or gains will not be subject to Australian income and/or withholding taxes.
The three conditions above are satisfied having regard to the relevant facts and circumstances of Entity A's Australian shareholdings. Therefore, the Australian sourced dividend income and gains made by Entity A from the disposal of shares in Australian companies, where the shares are held as part of its equity portfolio, are exempt from Australian income and withholding taxes under the doctrine of sovereign immunity.