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Edited version of your written advice
Authorisation Number: 1012997476674
Date of advice: 20 April 2016
Ruling
Subject: Sovereign Immunity
Question 1
Will Entity A be immune from income and withholding taxes on:
• interest income derived from Australian debt instruments
• dividend income derived from Australian shares
• distributions received from widely held Australian managed investment funds or unit trusts, and
• other sundry income which are received as part of distributions from Australian real estate/property unit trusts
under the common law doctrine of sovereign immunity?
Answer
Yes.
This ruling applies for the following period:
Years ended XXXX
The scheme commences on:
During the year ended XXXX.
Relevant facts and circumstances
1. Entity A was established by a foreign government in accordance with a statute.
2. Entity A forms part of the foreign government and is responsible for administering the foreign government's economic and financial policies.
3. Entity A is managed and controlled by the foreign government.
4. On re-establishment of Entity A, any remaining moneys and/or assets will remain assets of the foreign government.
5. Entity B invests the moneys entrusted by Entity A. Profits from the management of the moneys belong to Entity A. Entity A may demand payment from the profits with notice.
6. Entity A derives income from Australian debt instruments such as bonds and deposits at financial institutions, dividend income derived from Australian shares, distributions received from widely held Australian managed investment funds or unit trusts and distributions from Australian real estate/property unit trusts.
7. Each holding held by Entity A in each Australian company and each Australian unit trust is less than 10% of the total shares/units on issue for each company/unit trust.
8. Entity A is not entitled to and has not appointed any director to the Board of Directors of any of the Australian companies or the trustee/Responsible Entity of the Australian unit trusts in which it holds shares or units.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 128B
Income Tax Assessment Act 1997 section 4-1
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.
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 forms part of the foreign government and is responsible for administering the foreign government's economic and financial policies.
In view of the above, it is considered that Entity A 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 is managed and controlled by the foreign government.
On re-establishment of Entity A, any remaining moneys and/or assets will remain assets of the foreign government.
Entity B invests the moneys entrusted by Entity A. Profits from the management of the moneys belong to Entity A. Entity A may demand payment from the profits with notice.
In view of the above, it is considered that the moneys invested by Entity A 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 A's investments in Australian debt instruments, Australian shares, units in widely held Australian managed investment funds or unit trusts and Australian real estate/property unit trusts, it is necessary to consider the extent of its holding and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of the entities.
Entity A derives income from Australian debt instruments such as bonds and deposits at financial institutions, dividend income derived from Australian shares, distributions received from widely held Australian managed investment funds or unit trusts and distributions from Australian real estate/property unit trusts.
Each shareholding held by Entity A in each Australian company and each Australian unit trust is less than 10% of the total shares/units on issue for each company/unit trust.
Entity A is not entitled to and has not appointed any director to the Board of Directors of any of the Australian companies or the trustee/RE of the Australian unit trusts in which it holds shares or units.
In view of the above, it is accepted that Entity A's investments in Australia constitutes non-commercial activities.
Conclusion
As discussed above, the three conditions in relation to Entity A's Australian investments are satisfied. Accordingly, pursuant to the common law doctrine of sovereign immunity, Entity A will be immune from income and withholding taxes on interest income derived from Australian debt instruments, dividend income derived from Australian shares, distributions received from widely held Australian managed investment funds or unit trusts, and other sundry income received as part of distributions from Australian real estate/property unit trusts.