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Edited version of your written advice
Authorisation Number: 1013020812558
Date of advice: 25 May 2016
Ruling
Subject: Sovereign immunity
Question
Will the Company be immune from income tax and withholding tax on distributions received by it from its unit holding in the Trust, and interest received on loans it has made to the Trust under the common law doctrine of sovereign immunity?
Answer
Yes.
This ruling applies for the following periods:
XXXX to XXXX
The scheme commences on:
XXXX
Relevant facts and circumstances
1. The Company is a foreign resident company.
2. The Company is indirectly wholly-owned by Entity A.
3. Entity A is a statutory body incorporated under the statute of a Foreign Government. Entity A was set up by the Foreign Government to own assets and act as a holding company for legal entities. Entity A has the full capacity to act on behalf of the Foreign Government.
4. The statute of the Foreign Government states that the President may vest, in Entity A, any property currently being vested in a public officer or authority, and vice versa.
5. The funds used by the Company are from the foreign reserves of the Foreign Country.
6. The purpose of the investments by the Company is to preserve and enhance the foreign reserves of the Foreign Country.
7. The Company holds units in the Trust, which is an Australian unit trust.
8. The Trust owns shares in an Australian Company.
9. The Company has provided interest bearing loans to the Trust.
10. The trustee of the Trust has on-lent the loans, on identical terms and conditions, to an Australian Company.
11. The investments in the Trust do not give the Company any control or voting rights over the Trust.
12. The Company does not participate in any decision making of the Trust or the Australian Company.
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 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 is a statutory body incorporated under the statute of a Foreign Government. Entity A was set up by the Foreign Government to own assets and to act as a holding company for legal entities.
Entity A has the full capacity to act on behalf of the Foreign Government.
The Company is indirectly wholly-owned by Entity A and is being used by Entity A to make investments.
In view of the above, it is considered that the Company 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
The statute of the Foreign Government states that the President may vest, in Entity A, any property currently being vested in a public officer or authority, and vice versa. Thus the property which is vested in Entity A remains the property of the Foreign Government, as the property is ultimately controlled by the President. Furthermore, the funds used by the Company to make investments form part of the foreign reserves of the Foreign Country, and will remain so for the duration that the Company holds the investment.
In view of the above, it is considered that the moneys invested by the Company 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 equity investments, 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 the Company's investment in Australia, through its unit holding in the Trust and the loans, constitutes non-commercial activity it is necessary to consider the nature and extent of the investment and the degree of its actual or potential influence in decision making in the entities which are being invested in.
The loans are repayable by the Trust to the Company. The loans and the unit holding in the Trust do not give the Company any control or voting rights over the Trust.
Additionally, the Company does not participate in any decision making of the Trust or the Australian Company.
In view of the above, it is accepted that the Company's investment in Australia constitutes a non-commercial activity.
Conclusion
As discussed above, the three conditions in relation to the Company's investment in Australia are satisfied. Accordingly, pursuant to the common law doctrine of sovereign immunity, the Company will be immune from income tax and withholding tax on distributions received by it from its unit holding in the Trust and interest received on loans it has made to the Trust.