Edited version of your written advice

Authorisation Number: 1051330100967

Date of advice: 19 March 2018

Ruling

Subject: Sovereign Immunity

Question

Will Entity Z be immune from Australian income and withholding taxes on:

● interest received on Australian fixed income securities

● dividends received from Australian shares

● gains made by it from the disposal of Australian shares under the common law doctrine of sovereign immunity?

Answer

Yes

This ruling applies for the following period:

From XXXX to XXXX

The scheme commences on:

XXXX

Relevant facts and circumstances

1. Entity Z was established by a foreign government in accordance with state laws.

2. Entity Z was established with moneys from the foreign government.

3. Entity Z receives money from the foreign government to invest on its behalf.

4. Entity Z is managed by another foreign government entity in accordance with laws of the foreign government.

5. Entity Z owns fixed income securities from which it derives Australian sourced interest income.

6. Entity Z owns shares in Australian companies from which it receives dividends. Entity Z may also makes gains on the disposal of those shares.

7. Each shareholding held by Entity Z in each Australian company is less than 10% of the total shares on issue for each company.

8. Entity Z is not entitled to and therefore has not appointed a director to the Board of Directors of any of the Australian companies in which it holds shares.

9. Entity Z earns interest income from its investments in interest bearing securities. It does not invest in interest bearing securities for the purpose of supporting money lending activities.

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, the income and/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 Z was founded in accordance with the foreign government statutes and all assets of Entity Z are assets of the foreign government. Accordingly, the person making the investments (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 Z was established with moneys of the foreign government and receives money from the foreign government to invest on its behalf. Entity Z is managed by another government entity in accordance with laws of the foreign government. All income and assets of Entity Z are owned by the foreign government. Therefore, the moneys invested are and will remain government moneys.

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.

Entity Z owns fixed income securities from which it derives Australian sourced interest income. Entity Z owns shares in Australian companies from which it receives dividends. Entity Z may also make gains on the disposal of those shares. Each shareholding held by Entity Z in each Australian company is less than 10% of the total shares on issue for each company. Entity Z is not entitled to and therefore has not appointed any director to the Board of Directors of any of the Australian companies in which it holds shares in. Thus Entity Z has no authority or involvement in the operations of the companies in which it invests.

Further, although Entity Z earns interest income from its investments in interest bearing securities, it does not invest in interest bearing securities for the purpose of supporting money lending activities.

Therefore, it is considered that Entity Z’s investments in Australian fixed income securities and shares are non-commercial activities.

Conclusion

As the three conditions for immunity under the common law doctrine of sovereign immunity are satisfied, Entity Z will be immune from Australian income and withholding taxes for interest received on Australian fixed income securities, dividends received from Australian shares and gains made by it from the disposal of the Australian shares.