Edited version of your written advice

Authorisation Number: 1012987607923

Date of advice: 22 March 2016

Ruling

Subject: Sovereign immunity

Question 1

Is entity B immune from income tax or withholding tax on interest income, rental income, trust distributions, managed investment distributions and any other income including capital gains derived from the following investments under the common law doctrine of sovereign immunity:

a. Entity B's X% equity interest in entity C?

b. Entity B's X% equity interest in entity D?

c. Entity B's X% equity interest in entity E?

Answer

Yes.

Question 2

Is entity B immune from income tax or withholding tax on income or gains derived from its debt interest in entity F under the common law doctrine of sovereign immunity?

Answer

No.

This ruling applies for the following periods

Year ended 31 December 2016

Year ended 31 December 2017

Year ended 31 December 2018

Year ended 31 December 2019

The scheme commenced on

1 January 2016

Relevant facts and circumstances

Entity A

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 or assets will remain assets of the foreign government.

Entity B

6. Entity B is a wholly owned subsidiary of entity A.

7. The Directors of entity B are selected by entity A to ensure the company acts in a manner consistent with entity A.

8. Entity B is currently funded primarily by a mixture of equity and shareholder/affiliate loans from entity A. Entity B additionally obtains third party finance.

Entity B's investments

Entity C

9. Entity B's investment represents a total X% holding in entity C.

10. Entity B, in its own right, has no representation on any Board or committee related to entity C.

11. Entity B, in its own right, has no involvement in the management of entity C.

Entity D

12. Entity B's investment represents a total X% holding in entity D.

13. Entity B, in its own right, has no representation on any Board or committee related to entity D.

14. Entity B, in its own right, has no involvement in the management of entity D.

Entity E

15. Entity B's investment represents a total X% holding in entity E.

16. Entity B, in its own right, has no representation on any Board or committee related to entity E.

17. Entity B, in its own right, has no involvement in the management of entity E.

Entity F

18. Entity B has both a debt interest and equity interest in entity F. The equity interest is an X% holding in entity F.

19. Entity B has a seat on committee Y of entity F as a result of its equity holding in entity F. Entity B has X% of the voting power on committee Y.

20. Resolutions presented to entity F's committee Y may require either a unanimous or majority vote.

21. Other than noted above, entity B, in its own right, has no representation on any other Board or committee related to entity F.

22. Entity B, in its own right, has no involvement in the management of entity F.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

Question 1

Is entity B immune from income tax or withholding tax on interest income, rental income, trust distributions, managed investment distributions and any other income including capital gains derived from the following investments under the common law doctrine of sovereign immunity:

a. Entity B's X% equity interest in entity C?

b. Entity B's X% equity interest in entity D?

c. Entity B's X% equity interest in entity E?

Detailed reasoning

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 engages 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.

When determining whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains 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 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, then the income or gains will not be subject to Australian income tax and/or withholding tax.

Condition 1 - that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government

Entity A was established by a foreign government in accordance with a statute.

Entity A is managed and controlled by the foreign government.

Accordingly, entity A is an agency of a foreign government.

Furthermore, entity B is a wholly owned subsidiary of entity A. The Directors of entity B are selected by entity A to ensure the company acts in a manner consistent with entity A.

For the above reasons, it is considered that entity B meets the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government.

Condition 2 - that the moneys invested are and will remain government moneys

Entity A and its assets are wholly owned by the foreign government.

Entity B is a wholly-owned subsidiary of entity A and acts in a manner consistent with the entity.

Entity B is currently funded primarily by a mixture of equity and shareholder/affiliate loans from entity A. Entity B additionally obtains third party finance.

On liquidation of entity A, any remaining moneys or assets will remain assets of the foreign government.

For the above reasons, it is considered that the moneys invested by entity B are and will remain the moneys of the foreign government. Therefore, this condition is satisfied.

Condition 3 - that the income or gain is being derived from a non-commercial activity

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. However, in relation to the holding of shares in a company, or units in a unit trust, the extent of the relevant holding may give rise to questions as to whether it constitutes a commercial activity, which includes the carrying on of a business.

In determining whether entity B's investments each constitute a non-commercial activity, it is necessary to consider the nature of the investments including the extent of its holding and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of any entity related to the investments.

a. Entity C

The extent of entity B's holding in entity C, being X%, does not of itself give rise to a question as to whether the investment constitutes a commercial activity.

Additionally, entity B, in its own right, has no representation on any Board or committee related to entity C. Entity B, in its own right, has no involvement in the management of entity C. Therefore, entity B's degree of actual or potential influence in respect of the financial, operating and policy decisions of this entity is also not indicative of a commercial activity.

Based on the facts and circumstances outlined above, it is considered that entity B's investment in entity C constitutes a non-commercial activity.

Accordingly, the condition that the income or gain is being derived from a non-commercial activity is satisfied.

b. Entity D

The extent of entity B's holding in entity D, being X%, does not of itself give rise to a question as to whether the investment constitutes a commercial activity.

Additionally, entity B, in its own right, has no representation on any Board or committee related to entity D. Entity B, in its own right, has no involvement in the management of the entity. Therefore, entity B's degree of actual or potential influence in respect of the financial, operating and policy decisions of this entity is also not indicative of a commercial activity.

Based on the facts and circumstances outlined above, it is considered that entity B's investment in entity D constitutes a non-commercial activity.

Accordingly, the condition that the income or gain is being derived from a non-commercial activity is satisfied.

c. Entity E

The extent of entity B's holding in entity E, being X%, does not of itself give rise to a question as to whether the investment constitutes a commercial activity.

Additionally, entity B, in its own right, has no representation on any Board or committee related to entity E. Entity B, in its own right, has no involvement in the management of the entity. Therefore, entity B's degree of actual or potential influence in respect of the financial, operating and policy decisions of this entity is also not indicative of a commercial activity.

Based on the facts and circumstances outlined above, it is considered that entity B's investment in entity E constitutes a non-commercial activity.

Accordingly, the condition that the income or gain is being derived from a non-commercial activity is satisfied.

Conclusion

The three conditions are satisfied in relation to:

a. Entity B's X% equity interest in entity C

b. Entity B's X% equity interest in entity D, and

c. Entity B's X% equity interest in entity E.

Therefore, entity B is immune from income tax or withholding tax on interest income, rental income, trust distributions, managed investment distributions and any other income including capital gains derived from these investments under the common law doctrine of sovereign immunity.

Question 2

Is entity B immune from income tax or withholding tax on income or gains derived from its debt interest in entity F under the common law doctrine of sovereign immunity?

Detailed reasoning

Condition 1 - that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government

As provided under question 1, entity B meets the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government.

Condition 2 - that the moneys invested are and will remain government moneys

As provided under question 1, the moneys invested by entity B are and will remain the moneys of the foreign government. Therefore, this condition is satisfied.

Condition 3 - that the income or gain is being derived from a non-commercial activity

In determining whether entity B's investment in the entity F debt interest constitutes a non-commercial activity, the Commissioner must have regard to entity B's investment in entity F in its totality.

1. Debt and equity interest

Entity B has both a debt interest and an X% equity interest in entity F.

The X% equity interest in entity F is a non-portfolio holding, being greater than 10%. It would be difficult to conclude that an X% equity interest (with no accompanying debt interest) in an entity constitutes a non-commercial activity, even in the circumstance where the particular investor does not legally hold an ability to influence the financial, operational and policy decisions of that entity (for example, by way of a seat on a Board or committee).

In addition to this equity interest, entity B has also provided capital to entity F by way of a debt interest.

The combination of the debt and equity interest is considered indicative of a commercial investment by entity B in entity F.

2. Committee Y of entity F

Entity B holds one of the seats on committee Y of entity F. This seat allows entity B to vote on various resolutions of entity F. Resolutions presented to entity F's committee Y may require either a unanimous or majority vote.

These resolutions have the potential to influence the strategic direction and policy decisions of entity F.

Entity B holds significant influences in respect of the resolutions of entity F's committee Y. This includes the ability to veto resolutions requiring a unanimous vote and holding X% of the voting power on resolutions which require a majority vote.

As such, entity B, through its seat on committee Y of entity F, does have the actual or potential ability to influence the financial, operational and policy decisions of entity F. This influence is considered indicative of a commercial investment by entity B in entity F.

3. Conclusion

Consequently, when the investment in entity F by entity B is viewed in totality, the Commissioner considers that the investment by entity B in the debt interest is part of a commercial activity.

Therefore, the condition that the income or gain is being derived from a non-commercial activity is not satisfied.