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Edited version of your written advice
Authorisation Number: 1051406436269
Date of advice: 31 July 2018
Ruling
Subject: Sovereign Immunity
Question
Is the entity immune from Australian income tax and withholding tax on income or gains arising from its investment in the securities under the common law doctrine of sovereign immunity?
Answer
Yes.
This ruling applies for the following period:
XXXX to XXXX
The scheme commences on:
XXXX
Relevant facts and circumstances
The entity was established by a foreign government in accordance with a statute to perform governmental functions.
The entity was established with moneys of the foreign government.
The entity receives money from the foreign government to invest on its behalf.
The entity is managed and controlled in accordance with foreign government laws.
On liquidation of the entity, any remaining moneys and/or assets will remain assets of the foreign government.
The entity derives Australian sourced income from the securities which are issued by an Australian resident entity.
The entity does not hold any ordinary shares in the Australian resident entity or any other equity or debt interests issued by the entity.
Majority holders of the securities have certain rights which could, in some circumstances, give actual or potential influence in respect of the financial, operating and policy decisions of the Australian resident entity.
The entity has undertaken to the Australian resident entity that it will not, separately or together with others, exercise these rights.
The entity does not hold enough securities to be a majority holder in its own right.
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
The entity was established by a foreign government in accordance with a statute to perform governmental functions. Therefore, 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 entity was established with moneys of the foreign government. The entity receives money from the foreign government to invest on its behalf. The entity is managed and controlled in accordance with foreign government laws. On liquidation of the entity, remaining moneys invested are, and will remain, government moneys. 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 there may be instances where the extent of the relevant investment, and the actual or potential influence it provides, may give rise to questions as to whether it constitutes a passive investment or commercial activity.
On the facts of this case the entity does not have influence with respect to the management and operations of the Australian resident entity in which it holds the securities. Therefore, it is considered that the holding is a non-commercial activity.
Conclusion
As the three conditions for immunity under the doctrine of sovereign immunity are satisfied, the entity will be immune from Australian income and withholding taxes in relation to income or gains derived from its investment in the securities.