Edited version of private advice

Authorisation Number: 1051845007059

Date of advice: 8 June 2021

Ruling

Subject: International issues - sovereign immunity

Question 1

Will the Foreign Entity be immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investments in Australian equity securities, for the period DDMMYYYY to DDMMYYYY?

Answer

Yes.

Question 2

Will the Foreign Entity be immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its Australian investments, for the period DDMMYYYY to DDMMYYYY?

Answer

Yes.

Question 3

Is the ordinary and statutory income derived by the Foreign Entity from its Australian investments, not assessable and not exempt income under section 880-105 of the ITAA 1997 for the period DDMMYYYY to DDMMYYYY?

Answer

Yes.

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

1.    Under Foreign Law, Foreign Government conducts the administrative affairs of Foreign Country.

2.    Under Foreign Law the Foreign Entity is managed by the Foreign Government

3.    In general, under Foreign Law, Public servants serving in the Foreign Government must be permanent residents of the Region.

The Foreign Entity

4.    The Foreign Entity is responsible for the management of Foreign Country's reserves. It supervises monetary and financial operations according to terms established in Foreign Law and advises the Foreign Government on monetary policies.

5.    The Foreign Entity acts as the central bank.

6.    The Foreign Entity is governed by the rules outlined in Foreign Regulation (the Rules).

7.    The Foreign Entity is subject to the Foreign Government's guidance.

8.    The Rules states that the Foreign Entity, is a public-law legal person with administrative, financial and patrimonial autonomy, and the status of a personalised public service.

9.    The Foreign Entity's head office is in Foreign Country.

10.  It is the responsibility of the Foreign Entity to conduct central bank activities.

11.  The Rules outline the supervisory role of the Foreign Entity and details that it is within its supervisory powers to guide, coordinate, monitor and supervise the money, financial, foreign-exchange and insurance markets of the Foreign Country.

12.  The Rules also outline the Foreign Entity's responsibilities in relation to its functions as central depository and manager of foreign- exchange reserves.

13.  The Rules state that the Foreign Entity may, amongst other things, make investments, open deposit accounts and buy and sell, in foreign currencies, gold, securities and other instruments and assets usually traded on international money and financial markets. As well as carry out any other operation necessary for the performance of the function of the exchange reserve management, namely short-term loans.

Exchange Reserve, Funding & Income

14.  The Rules states that the Foreign Entity holds assets denominated in freely convertible currencies and of other eligible assets according to law, contract, or authorisation from the Foreign Government, even if held or managed by other entities.

15.  The Foreign Entity's assets and financial management is governed by the corresponding regulations of the rules and internal regulations.

16.  The budget of the Foreign Entity is approved by Foreign Government and is part of the Foreign Government budget.

17.  The Foreign Government provided the Foreign Entity's original funds to perform the functions of a central treasury depository and manage the Foreign Country's currency reserves.

18.  The Foreign Entity's sources of income include return on assets, earning from operations and investments, fees, fines, gifts, endowments, and other income payable by law.

19.  Any profit made by the Foreign Entity is appropriated as approved by the Foreign Government.

20.  The Foreign Entity's a portion of the net revenue is distributed annually to the Foreign Government with the remainder to be incorporated into the accounts of the Foreign Entity.

Management

21.  The Foreign Entity is overseen by a Board of directors.

22.  The Board supervises all activities of the Foreign Entity.

23.  The Foreign Entity's Board of Directors is appointed by the Foreign Government.

Investment Activities of the Foreign Entity

24.  The Foreign Entity invests a portion of the foreign exchange reserves in investments made in Australia or with Australian residents.

25.  The Australian investments comprise of equity investments, bonds, notes, certificate of deposits and supranational investments.

26.  The Foreign Entity invests directly into Australia as well as through investment managers who are bound by guidelines and restrictions.

27.  The Foreign Entity is unable to invest more than two percent of the market capitalisation of each Australian company.

28.  The Foreign Entity is not represented on any board of directors of the corporation in which it has invested.

29.  The Foreign Entity has no influence in operating the businesses in which it has invested. Specifically,

a.    Neither the Foreign Entity, nor any related party, has any involvement in the day to day management of the issuing entity's business

b.    Neither the Foreign Entity, nor a related party, hold any right to appoint a person to a board, committee or similar, either directly or indirectly

c.     Neither the Foreign Entity, nor a related party, entered into or received any side letters, arrangements or agreements in relation to its investments

d.    Neither the Foreign Entity, nor a related party, hold any veto rights on security holder votes

e.    The Foreign Entity, along with any related party, has rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity.

f.      For equity investments managed by external fund managers the total amount of investment in any company has not exceeded x% of the total market capitalisation of the company

Other relevant facts

30.  The Foreign Entity provided a letter from Foreign Government:

a.    The Foreign Entity is a governmental corporate entity, and

b.    The Foreign Entity is not subject to taxation under the laws of Foreign Country.

Relevant legislative provisions

Division 880 of the Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision

Question 1

Will the Foreign Entity be immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investments in Australian equity securities, for the period DDMMYYYY to DDMMYYYY?

Summary

The Foreign Entity is immune from income tax and withholding tax on all income and gains derived from its investments in Australian equity securities for the period DDMMYYYY to DDMMYYYY pursuant to the common law doctrine of sovereign immunity.

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 monies invested are and will remain government monies, 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: A foreign government or agency of a foreign government

For the Foreign Entity's Australian income to be exempt from tax under the doctrine of sovereign immunity, it must be established that it is part of a foreign government or is a body exercising governmental functions.

In the context of sovereign immunity, it is considered that an entity which is wholly owned by a foreign government is an 'agency of a foreign government' where that entity is performing a function for the public advantage and executes a function in the public interest and is not a private body established for private profit.

The Foreign Entity is a part of the Foreign Government for the following reasons:

•      The Foreign Entity is a governmental corporate entity incorporated in Foreign Country.

•      The Foreign Entity is governed by the Rules. The Rules state that it is the responsibility of the Foreign Entity to advise and support the Foreign Government in its central banking activities.

•      The Foreign Entity is subject to the Foreign Governments guidance.

•      The Foreign Government appoints the Board of Directors.

The above-mentioned factors support a finding that the Foreign Entity is an agency or instrumentality of the Foreign Government and consequently satisfies Condition 1 with respect to sovereign immunity.

Condition 2: the monies being invested are and will remain government monies

In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested are and will remain government monies.

Under the Rules, the Foreign Entity's sources of income include return on assets, earning from operations and investments, fees, fines, gifts, endowments, and other income payable by law or assigned to it by law, regulation, contract, court or Foreign Government's decision.

The Rules states that the net profit for each fiscal year is appropriated as approved by the Foreign Government.

There is no evidence to suggest that the invested monies will not remain government monies.

Accordingly, the Commissioner has determined monies that are invested by the Foreign Entity are, and will, remain government monies, satisfying Condition 2 with respect to sovereign immunity.

Condition 3: The income or gain is being derived from a non-commercial activity

When determining whether the doctrine of sovereign immunity applies to provide immunity for Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish that the income or gain is being derived from a non-commercial activity.

As noted in ATO Interpretative Decision ATO ID 2002/45 Sovereign Immunity (Withdrawn), whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. A passive investment is more likely to be considered a non-commercial transaction.

In relation to the ownership of shares in a company or other similar equity interests, there will be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment.

In all circumstances, consideration will be given to factors relating to the influence or control potentially able to be exercised by the investor (or a related party/associate of the investor) in relation to the investment. This includes (but is not limited to) any potential influence or control in relation to day to day management and key business, strategy and financial decisions.

Equity Investments held between DDMMYYYY to DDMMYYYY

The Foreign Entity currently holds a number of direct equity investments in Australia including interests in Australian listed companies. The Foreign Entity also holds investments managed by external fund managers.

The relevant characteristics of these investments are as follows:

•         The Foreign Entity, along with any related party, has a combined holding of less than 10% of the equity securities of the issuer.

•         Neither the Foreign Entity, nor any related party, has any involvement in the day to day management of the issuing entity's business.

•         Neither the Foreign Entity, nor a related party, hold any right to appoint a person to a board, committee or similar, either directly or indirectly.

•         Neither the Foreign Entity, nor a related party, entered into or received any side letters, arrangements or agreements in relation to its investments.

•         Neither the Foreign Entity, nor a related party, hold any veto rights on security holder votes.

•         The Foreign Entity, along with any related party, has rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity.

•         For equity investments managed by external fund managers the total amount of investment in any company has not exceeded X% of the total market capitalisation of the company.

Based on the facts and circumstances detailed above, the Commissioner accepts the income or gain being derived from the Foreign Entity's Australian investments between DDMMYYYY to DDMMYYYY is from a non-commercial activity.

Conclusion

As the three conditions of sovereign immunity have been satisfied, the Foreign Entity is immune from income taxes and withholding taxes on all income and gains it derives from its Australian investments, under the common law doctrine of sovereign immunity for the period DDMMYYYY to DDMMYYYY.

Question 2

Will the Foreign Entity be immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its Australian investments, for the period DDMMYYYY to DDMMYYYY?

Summary

The Foreign Entity is immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its Australian investments, for the period DDMMYYYY to DDMMYYYY.

Detailed reasoning

As explained above there are three conditions to be met for the Foreign Entity to be immune under the common law of sovereign immunity on any income and capital gains. As already detailed, the Foreign Entity meets the first two conditions.

The following outlines the reasoning for why Condition 3 is met for these different investments.

Condition 3: The income or gain is being derived from a non-commercial activity

Debt Investments held between DDMMYYYY to DDMMYYYY

The Foreign Entity directly holds a number of Commonwealth and State government bonds, notes, corporate debt securities, and derivatives.

The relevant characteristics of these investments are as follows:

•         The Australian investments are held by the Foreign Entity until maturity which, in the case of the current investments, is for a period ranging from two years to five years.

•         The Foreign Entity, along with any related party, has a combined holding of less than 10% of the equity securities of the debt issuer.

•         Neither the Foreign Entity, nor any related party, has any involvement in the day to day management of the debt issuers business

•         Neither the Foreign Entity, nor a related party, hold any right to appoint a person to a board, committee or similar, either directly or indirectly to the debt issuer

•         Neither the Foreign Entity, nor a related party, entered into or received any side letters, arrangements or agreements in relation to its investments with the debt issuer

•         Neither the Foreign Entity, nor a related party, hold any veto rights on security holder votes with the debt issuer

•         Implementation of the Foreign Entity's global investments follows its guidelines. The guidelines do not indicate that income is derived in a commercial manner.

•         Interest income received from the investments is distributed annually to the Foreign Government.

The long-term nature of the Foreign Entity's investments and the lack of representation and influence in the businesses in which it invests illustrate the passive nature of the investments. Based on the facts and circumstances detailed above, the Commissioner accepts the income or gain being derived from the Foreign Entity's Australia investments between DDMMYYYY to DDMMYYYY is from a non-commercial activity.

Conclusion

Since the three conditions are satisfied, the Foreign Entity's claim for sovereign immunity on its Australian investments has been established. In line with long-standing practice, the Commissioner will not impose liability to withholding tax in respect of the interest income received from the Foreign Entity's Australian investments.

Question 3

Is the ordinary and statutory income derived by the Foreign Entity from its Australian investments not assessable and not exempt income under section 880-105 of the ITAA 1997 for the period DDMMYYYY to DDMMYYYY?

Summary

All of the conditions listed in subsection 880-105(1) of the ITAA 1997 have been satisfied in relation to the Foreign Entity's Australian investments. As such, section 880-105 of the ITAA 1997 will apply to the effect that amounts of ordinary and statutory income derived by the Foreign Entity from its Australian investments are not assessable and not exempt income for the period from DDMMYYYY to DDMMYYYY.

Detailed reasoning

Section 880-105 of the ITAA 1997 provides that amounts of ordinary and statutory income derived by a sovereign entity are not assessable and not exempt income if certain conditions are met. Those conditions are listed in subsection 880-105(1) of the ITAA 1997:

(a) the sovereign entity is covered by section 880-125; and

(b) the amount is a return on any of the following kinds of interest that the sovereign entity holds in another entity (the test entity):

(i) a *membership interest;

(ii) a *debt interest;

(iii) a *non-share equity interest; and

(c) the test entity is:

(i) a company that is an Australian resident at the time (the income time) when the amount becomes ordinary or statutory income of the sovereign entity; or

(ii) a *managed investment trust in relation to the income year in which the income time occurs; and

(d) the *sovereign entity group of which the sovereign entity is a member satisfies the portfolio interest test in subsection (4) in relation to the test entity:

(i) at the income time; and

(ii) throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time; and

(e) the sovereign entity group of which the sovereign entity is a member does not have influence of a kind described in subsection (6) in relation to the test entity at the income time.

These conditions are considered below.

The Foreign Entity is a covered sovereign entity

Section 880-125 of the ITAA 1997 states:

A *sovereign entity is covered by this section if it satisfies all of the following requirements:

(a) the entity is funded solely by public monies;

(b) all returns on the entity's investments are public monies;

(c) the entity is not a partnership;

(d) the entity is not any of the following:

(i) a *public non-financial entity;

(ii) a *public financial entity (other than a public financial entity that only carries on central banking activities).

These conditions are considered below.

The Foreign Entity is a sovereign entity

For an entity to be covered by section 880-125 of the ITAA 1997, it must be a sovereign entity. Section 880-15 of the ITAA 1997 defines a sovereign entity to be any of the following:

(a) a body politic of a foreign country, or a part of a foreign country;

(b) a *foreign government agency;

(c) an entity:

(i) in which an entity covered by paragraph (a) or (b) holds a *total participation interest of 100%; and

(ii) that is not an Australian resident; and

(iii) that is not a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936.

Subsection 995-1(1) of the ITAA 1997 defines 'foreign government agency' to mean:

(a) the government of a foreign country or of part of a foreign country; or

(b) an authority of the government of a foreign country; or

(c) an authority of the government of part of a foreign country.

The Foreign Entity is the central bank of Foreign Country. The Foreign Entity acts as a central depository and manager of foreign- exchange reserves, gold and other foreign assets and acts as a lender of last resort. The Foreign Entity guides, coordinates and inspect the money, financial, foreign-exchange and insurance markets as well as watches over the internal monetary stability and the external solvency of the local currency.

The Foreign Entity is a public-law legal person with administrative, financial and patrimonial autonomy which will continue to report to the Foreign Government.

As the Foreign Entity is a central bank and is accountable to the Foreign Government, the Foreign Entity is considered to be an agency of a foreign government.

Therefore, the Foreign Entity is a sovereign entity.

The Foreign Entity is funded solely by public monies

The phrase 'public monies' is not defined and as such takes its ordinary meaning. In the context of Division 880 of the ITAA 1997, this phrase essentially means monies raised by a foreign government (or part of a foreign government) for a public purpose which form part of the foreign government's (or part of the foreign government's) equivalent to Australia's Consolidated Revenue Fund (Roy Morgan Research Pty Ltd v FC of T & Anor [2011] HCA 35). This would ordinarily include general tax revenue, proceeds from the issue of government bonds, the proceeds of privatisations etc.

The Foreign Government provided the Foreign Entity's original funds to perform the functions of a central treasury depository and manage the territory's currency reserves. As the Foreign Entity is a public law-legal person with administrative, financial and patrimonial autonomy with the status of a personalised public service it is a now a self-funded entity.

Under the Rules, the Foreign Entity's sources of income include return on assets, earning from operations and investments, fees, fines, gifts, endowments, and other income payable by law or assigned to it by law, regulation, contract, court or Foreign Government's decision.

All returns on the Foreign Entity's investments are public monies

The net profit for each fiscal year is appropriated as approved by the Foreign Government.

The appropriation of revenues is disbursed to the Foreign Government or otherwise retained by the Foreign Entity.

As such, all returns on the Foreign Entity's investments are public monies.

The Foreign Entity is not a partnership

The Foreign Entity, is a public-law legal person with administrative, financial and patrimonial autonomy, and the status of a personalised public service, that is governed by these rules and other applicable legislation.

A letter issued by the Foreign Government confirms that the Foreign Entity is a governmental entity, incorporated in the Foreign Country.

The Foreign Entity is not a partnership. As such, it passes this condition.

Not a public non-financial entity or public financial entity

Subsection 880-130(1) of the ITAA 1997 defines the term public non-financial entity:

An entity is a public non-financial entity if its principal activity is either or both of the following:

(a) producing or trading non-financial goods;

(b) providing services that are not financial services.

Subsection 880-130(2) of the ITAA 1997 defines the term public financial entity:

An entity is a public financial entity if any of the following requirements are satisfied:

(a) it trades in financial assets and liabilities;

(b) it operates commercially in the financial markets;

(c) its principal activities include providing any of the following financial services:

(i) financial intermediary services, including deposit-taking and insurance services;

(ii) financial auxiliary services, including brokerage, foreign exchange and investment management services;

(iii) capital financial institution services, including financial services in relation to assets or liabilities that are not available on open financial markets.

The Foreign Entity acts as the central bank of Foreign Country. The Foreign Entity satisfies the definition of a public financial entity provided for in subsection 880-130(2) of the ITAA 1997. However, subparagraph 880-125(d)(ii) of the ITAA 1997 states that public financial entities that only carry on central banking activities are not excluded from being a covered sovereign entity.

Paragraph 81 of the Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) lists the following as being considered as 'central banking activities':

• monetary policy development
• issuing national currency
• acting as custodian of international reserves, and
• providing banking services to government.

As provided by the Rules, it is the responsibility of the Foreign Entity to provide central banking activities as identified above.

The Rules also outlines that the Foreign Entity may, amongst other things, make investments, open deposit accounts and buy and sell, in foreign currencies, gold, securities and other instruments and assets usually traded on international money and financial markets. As well as carry out any other operation necessary for the performance of the function of the exchange reserve management, namely short-term loans.

It is considered that the above activities are consistent with the Foreign Entity being a public financial entity that only carries on central banking activities. As such, the Foreign Entity passes the condition in paragraph 880-125(d) of the ITAA 1997.

As the Foreign Entity satisfies each of the requirements in paragraphs 880-125(a) through (d) of the ITAA 1997 it is a sovereign entity that is covered by section 880-125 of the ITAA 1997 for the purposes of paragraph 880-105(1)(a) of the ITAA 1997.

The Foreign Entity's return is received on a relevant interest in the Test Entities

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(b) of the ITAA 1997, it must be a 'return on' a membership interest, debt interest or non-share equity interest held by the sovereign entity in the test entities.

As detailed in paragraph 4.37 of the Explanatory Memorandum to the Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 ('the EM'), a 'return on' a membershipinterest for the purposes of paragraph 880-105(1)(b) of the ITAA 1997 will include:

1.    dividends - including non-share dividends and dividends that pass through a managed investment trust (MIT)

2.    interest - including interest that passes through a MIT

3.    fund payments made by a MIT (other than fund payments that are attributable to non-concessional MIT income), and

4.    revenue gains made on the disposal of an interest in the test entity - including revenue gains that pass through a MIT.

The Test Entities the Foreign Entity holds interests in are Australian companies, and corporate, securitised, index linked and Government bonds and treasuries as well as banks from which it ordinarily derives income in the form of dividends, distributions from MITs and interest.

As such, the Foreign Entity will receive amounts which satisfy the requirements of paragraph 880-105(1)(b) of the ITAA 1997.

The Foreign Entity's income is received from Australian resident companies or managed investment trusts

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(c) of the ITAA 1997, it must be received from an entity that is either:

    (i)        a company that is an Australian resident at the time (the income time) when the amount becomes ordinary or statutory income of the sovereign entity; or

   (ii)        a *managed investment trust in relation to the income year in which the income time occurs.

The test entities are Australian companies for Australian income tax purposes.

As such, the Foreign Entity's income is received from entities which satisfy the requirements of paragraph 880-105(c) of the ITAA 1997.

The Foreign Entity's sovereign entity group satisfies the portfolio interest test

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(d) of the ITAA 1997, the sovereign entity and the sovereign entity group to which it belongs must satisfy the portfolio interest test in relation to the test entity/ies at both the income time and throughout any 12 month period that began no earlier than 24 months before that time and ended no later than that time.

The portfolio interest test is outlined in subsection 880-105(4) of the ITAA 1997, which states:

A *sovereign entity group satisfies the portfolio interest test in this subsection in relation to the test entity at a time if, at that time, the sum of the *total participation interests that each *member of the group holds in the test entity:

(a) is less than 10%; and

(b) would be less than 10% if, in working out the *direct participation interest that any entity holds in a company:

(i) an *equity holder were treated as a shareholder; and

(ii) the total amount contributed to the company in respect of *non-share equity interests were included in the total paid-up share capital of the company.

Section 880-20 of the ITAA 1997 provides the definition of sovereign entity group. Broadly, sovereign entities of the same foreign government will be members of the same sovereign entity group and sovereign entities of the same part of a foreign government will be members of the same sovereign entity group.

The Foreign Entity's guideline and restrictions to external fund managers, for bond securities, means the Foreign Entity holds no more than 10% for each security.

The Foreign Entity has stated that to the best of their knowledge no other members of the Foreign Entity's sovereign entity group (including any entity directly or indirectly owned by the Foreign Government) hold interests in the Test Entities.

As such, the Foreign Entity's interests in the Test Entities satisfy the requirements of paragraph 880-105(d) of the ITAA 1997.

The Foreign Entity's sovereign entity group does not have influence of a kind described in subsection (6)

For an amount of ordinary income or statutory income of a sovereign entity to satisfy paragraph 880-105(1)(e) of the ITAA 1997, at the income time the sovereign entity group to which the sovereign entity belongs must not have influence over the test entities of a kind described in subsection 880-105(6) of the ITAA 1997.

Subsection 880-105(6) of the ITAA 1997 states:

A *sovereign entity group has influence of a kind described in this subsection in relation to the test entity at a time if any of the following requirements are satisfied at that time:

(a) a *member of the group:

(i) is directly or indirectly able to determine; or

(ii) in acting in concert with others, is directly or indirectly able to determine;

the identity of at least one of the persons who, individually or together with others, make (or might reasonably be expected to make) the decisions that comprise the control and direction of the test entity's operations;

(b) at least one of those persons is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of a member of the group (whether those directions, instructions or wishes are expressed directly or indirectly, or through the member acting in concert with others).

As such, there are two distinct sub-tests within the influence test.

Sub-test 1 of the influence test, as contained in paragraph 880-105(6)(a) of the ITAA 1997, assesses whether the sovereign entity group is able to determine the identity of at least one of the persons who, individually or together with others, makes or is reasonably expected to make, decisions comprising the control and direction of the test entity's operations. This includes situations where the sovereign entity group is able to act in concert with others to determine the identity of a relevant decision-maker in the test entity.

Sub-test 1 also extends to situations where the sovereign entity group, in its own right, holds the ability to approve or veto decisions which go to the control or direction of the test entity.

The Foreign Entity has stated that to the best of their knowledge no other members of the Foreign Entity's sovereign entity group (including any entity directly or indirectly owned by the Foreign Government) hold interests in the Test Entities the influence considerations are limited to the influence held by the Foreign Entity.

The Foreign Entity's interests in the Test Entities do not provide it with an entitlement to either directly or indirectly determine the identity of any person who make decisions that comprise the control and direction of the Test Entities' operations.

Sub-test 2 of the influence test, as contained in paragraph 880-105(6)(b) of the ITAA 1997, assesses whether at least one of the relevant decision-making persons of the test entity is accustomed or obliged to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the sovereign entity group.

No person involved in the control and direction of the Test Entities' operations is accustomed or obliged to act in accordance with the directions, instructions or wishes of the Foreign Entity.

Based upon the above, the sovereign entity group of the Foreign Entity does not have influence of a kind described in subsection 880-105(6) of the ITAA 1997 and will, therefore, satisfy the requirements of paragraph 880-105(1)(f) of the ITAA 1997.

Conclusion

As all of the conditions listed in subsection 880-105(1) of the ITAA 1997 have been satisfied, section 880-105 of the ITAA 1997 will apply to the effect that amounts of ordinary and statutory income derived by the Foreign Entity from its investments in the Test Entities are not assessable and not exempt income for the period from DDMMYYYY to DDMMYYYY.