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Edited version of your written advice
Authorisation Number: 1012894554962
Date of advice: 16 October 2015
Ruling
Subject: Sovereign Immunity
Question
Is Company A immune from income and withholding taxes on trust distributions (comprising of interest income, dividend income, rental income and other income, including capital gains) received by it from its Australian unit holdings and any gains made by it from the disposal of its units under the common law doctrine of sovereign immunity?
Answer
Yes
This ruling applies for the following periods:
Year ended xxxx.
The scheme commences on:
During the income year ended xxxx.
Relevant facts and circumstances
1. Company A is a company established in a foreign country. Company A is wholly-owned by a foreign government entity (the Entity).
2. The Entity was established by a foreign government to invest the government's financial surplus resources.
3. The Entity has a separate legal personality and has financial and administrative independence, and has full legal capacity to act.
4. The only entity that has a beneficial interest in the ownership of the assets of the Entity is the foreign government.
5. If the Entity was to be dissolved or liquidated, its assets would remain assets of the foreign government.
6. Company A acts as a holding company for certain investments of the Entity.
7. As a result of this structure Company A is directed and operated by the Entity who consequently acts on behalf of the foreign government.
8. Company A has an interest in an Australian unit trust and does not have any control right, board seats or involvement in the management or direction of the unit trust.
Relevant legislative provisions
None
Reasons for decision
For Australian income tax and withholding tax purposes it is accepted that the doctrine of sovereign immunity applies to a foreign government 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 an 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 or gain) 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 or gain is being derived from a non-commercial activity.
If these three conditions are satisfied, the Australian sourced income and gains will not be subject to Australian income and/or withholding taxes.
Condition 1 - a foreign government or an agency of a foreign government
The Entity was established by the government of a foreign country to invest the government's financial surplus resources.
The Entity invests in Australia through its wholly-owned subsidiary Company A.
In view of the above, it is considered that the Entity's ownership of Company A is an integral part of the foreign government's investment through the Entity. As Company A is a wholly-owned subsidiary of the Entity, the condition that the investment is made by a foreign government or an agency of a foreign government is satisfied.
Condition 2 - moneys are and will remain government moneys
As Company A is an agency of the foreign government, all investments and moneys will remain the property of the foreign government.
Funds invested by Company A will remain the property of the foreign government and will revert to the ultimate ownership of the foreign government in the event of the dissolution or liquidation of the Entity or Company A.
In view of the above, it is considered that the moneys invested by Company A are and will remain the moneys of a foreign government or an agency of a foreign government.
Condition 3 - non-commercial activity
An investment undertaken by a foreign government or an agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. However, it is necessary to establish whether the investment is non-commercial in nature and this will depend on the particular circumstances of the investment.
Company A has an interest in an Australian unit trust and does not have any control right, board seats or involvement in the management or direction of the unit trust.
In view of the above, it is considered that Company A's investment in the unit trust is non-commercial in nature.
Conclusion
As discussed above, the three conditions in relation to Company A's unit holdings is satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, Company A is immune from income and withholding taxes on trust distributions (comprising of interest income, dividend income, rental income and other income, including capital gains) received by it from its unit holdings and any gains made by it from the disposal of its units.