Edited version of private advice

Authorisation Number: 1051924231282

Date of advice: 23 November 2021

Ruling

Subject: International issues - sovereign immunity

Question

Is the ordinary and statutory income derived by Foreign Co from its Australian investments, listed at Appendix 1 to the relevant facts and circumstances of this ruling, not assessable and not exempt income under section 880-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ending 31 December 20XX

Year ending 31 December 20XX

Year ending 31 December 20XX

Year ending 31 December 20XX

Year ending 31 December 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XX Country

Under the Constitution of the XX Country, the XX Country is a democratic republic.

The Constitution also provides that the State power in XX Country is based on the principle of separation of powers.

The Constitution states the President of XX Country is the head of the state.

The Constitution provides that the President of XX Country is to issue decrees for the establishment of general rules and issue orders for other matters, which enter into force on the day of their publication, unless otherwise provided for in the decree or order (Presidential Decree).

Foreign Co

Foreign Co was established by Presidential Decree for the purpose of acting as a sovereign wealth fund.

Foreign Co is governed by the legal framework contained in the relevant Statute.

In accordance with the Statute, Foreign Co is accountable to the President of XX Country.

The Statute provides that Foreign Co is an extra-budgetary state institution, is a legal entity and has accounts at banking institutions.

Foreign Co and its assets are wholly owned by Government of XX Country.

The Statute provides that the main responsibility of Foreign Co is to ensure collection and effective management of foreign currency and other assets in the best interests of the citizens and future generations of XX Country.

The Statute provides that Foreign Co's revenue sources are mainly comprised of the revenues generated from implementation of the agreements on exploration, development and production sharing of natural resources in XX Country. This includes agreements entered into between the ABC Co and other authorised state bodies and investors.

Under the Statute, Foreign Co's revenue is exempt from tax, duties and other charges.

Foreign Co does not have an Australian tax file number, maintain an office or engage in any trade or business in Australia.

ABC Co

ABC Co was established by Presidential Decree to use natural resources in accordance with a consistent national policy.

In accordance with ABC Co's Charter, the assets of ABC Co and enterprises belonging to it are wholly owned by XX Country.

ABC Co acts as the trader of XX Country's natural resources. ABC Co implements, on behalf of XX Country, the collection of fees and revenues generated and transfers these revenues to Foreign Co net of its expenses.

Use of Foreign Co's Assets.

The Statute provides that the assets of Foreign Co are to be utilised in accordance with the program which is to be approved each year by the President of XX Country.

Foreign Co's assets may be used for solving the most important nation-wide problems, for construction and reconstruction of strategically significant infrastructure facilities, and for the purpose of XX Country's socio-economic development.

Foreign Co is not in the business of money lending as the assets of Foreign Co may neither be used for lending to government bodies, public and non-public enterprises (organisations), nor as a collateral for debts (commitments, guarantees), and / or other liabilities of any entity under the jurisdiction of XX Country.

Accordingly, Foreign Co does not have customers nor operate accounts, or hold funds, for third parties.

Management and Control of Foreign Co

The Director carries out the operational management of Foreign Co's activities. The Director is appointed and dismissed by the President of XX Country.

The Board exercises general control over accumulation and spending of Foreign Co's assets.

The Statute provides the following with regards to the Board:

•                    members are approved by the President of XX Country

•                    it is comprised of representatives of relevant state bodies and public organisations, as well as of other persons, and

•                    members carry out their responsibilities without remuneration.

Contributions into Foreign Co

The Statute provides that Foreign Co receives revenue from the following sources:

•                    Net revenue generated from the sale of XX Country's natural resources

•                    Grants and other aid.

•                    Other revenues and inflows in accordance with the legislation.

Re-establishment and Liquidation of Foreign Co

The Statute provides that re-establishment and liquidation of Foreign Co shall be carried out by Presidential Decree.

On liquidation or re-establishment of Foreign Co, any remaining money and / or assets will remain assets of the Government of XX Country.

Foreign Co's Australian Investments

Foreign Co does not actively trade in financial assets and liabilities, operate commercially in financial markets or provide any of the services listed in paragraph 880-130(2)(c) of the ITAA 1997.

Foreign Co's investment portfolio is managed in accordance with the investment guidelines established by Presidential Decree (Investment Guidelines).

The Investment Guidelines set the general principles of Foreign Co's asset management framework. The Investment Guidelines outline the permissible asset classes, currencies, the minimum requirements for the external managers and defines the credit quality limits for the counterparties such as custodian and correspondent banks.

All Australian Dollar (AUD) investments are held through Global Custodian, Custodian Co. As Global Custodian, Custodian Co provides general safekeeping and administrative services in relation to Foreign Co's investment holdings.

Custodian Co has appointed Sub-custodian Co as the sub-custodian for Foreign Co's Australian investments. All assets are held by Sub-custodian Co are to the order of Custodian Co.

In the event that Foreign Co wish to receive dividend income, as opposed to reinvesting it, payment will be made from the custody account at Custodian Co to a bank account of Foreign Co's choosing. All income received from the Australian shares held by Foreign Co is therefore paid for the benefit of Foreign Co via the custodians.

Foreign Co holds approximately $XX million in Australian shares.

The Australian investments held by Foreign Co have the following characteristics:

•                    the shares are listed on the Australian Securities Exchange (ASX)

•                    Foreign Co and the sovereign entity group to which it belongs hold less than 10% of the total shares on issue for each Australian company

•                    Foreign Co and the sovereign group to which it belongs has no involvement in the day to day management of the business of any of the Australian companies

•                    Foreign Co and the sovereign entity group to which it belongs has no right to appoint a director to the Board of Directors of any issuing Australian company

•                    Foreign Co and the sovereign entity group to which it belongs has no right to representation on any investor representative or advisory committee (or similar) of any issuing Australian company

•                    Foreign Co and the sovereign entity group to which it belongs has no ability to direct or influence the operation of the Australian company outside of the ordinary rights conferred by the same interest held, and

•                    Foreign Co and the sovereign entity group to which it belongs only holds rights to vote as a shareholder in proportion to its share interest in the Australian company.

Appendix 1: Australian investments

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 880

Reasons for decision

The ordinary and statutory income derived by Foreign Co from its Australian investments, listed at Appendix 1 to the relevant facts and circumstances to this ruling, is not assessable and not exempt income due to the operation of section 880-105 of the ITAA 1997.

Detailed reasoning

Subdivision 880-C of the ITAA 1997 contains the provisions that provide a tax exemption for certain sovereign entities in respect of certain returns on membership interests in entities that are Australian resident companies or managed investments trusts. To obtain this exemption, the relevant sovereign entity group can hold only a portfolio interest in the entity and cannot have relevant influence over the entity.

Section 880-105 of the ITAA 1997 provides that a sovereign entity's income from an interest in a trust or company will be non-assessable non-exempt income if certain conditions are met.

The conditions are listed in subsection 880-105(1) of the ITAA 1997 as follows:

(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.

Foreign Co is a 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).

Therefore, Foreign Co is a sovereign entity for the purposes of section 880-125 of the ITAA 1997 if the following requirements are met:

i.                Foreign Co is a 'sovereign entity'

ii.                Foreign Co is funded solely by public monies

iii.                all returns on Foreign Co's investments are public monies

iv.                Foreign Co is not a partnership, and

v.                Foreign Co is not a public non-financial entity or public financial entity.

These requirements are considered below.

i.                Foreign Co 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 'sovereign entity' as:

A sovereign entity is 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.

'Foreign government agency' is defined in subsection 995-1(1) of the ITAA 1997 as meaning:

(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.

Foreign Co was established under the Decree of the President of XX Country and fulfils the purpose of developing and implementing the policy objectives intended to support social-economic progress of XX Country and to generate wealth for present and future generations.

Foreign Co is an extra-budgetary state agency of XX Country and is accountable to the President of XX Country. Foreign Co, as an agency of XX Country, undertakes activities directed towards achieving the primary purpose as intended under its establishment by XX Country.

Foreign Co is a legal entity and its assets are wholly owned by the Government of XX Country.

The management and control of Foreign Co is subject to Presidential Decree and it is controlled by a Board whose members are approved by the President of XX Country. The utilisation of Foreign Co's assets is carried out in accordance with the program, which is approved each year through Presidential resolutions.

As such, Foreign Co meets the requirements of being a sovereign entity in accordance with section 880-15 of the ITAA 1997 as it is a foreign government agency as defined in subsection 995-1(1) of the ITAA 1997.

Therefore, this requirement is satisfied.

ii.                Foreign Co is funded solely by public monies

The phrase 'public monies' is not defined and as such takes its ordinary meaning.

Law Companion Ruling LCR 2020/3 - The superannuation fund for foreign residents withholding tax exemption and sovereign immunity (LCR 2020/3) provides guidance on the term 'public monies'.In the context of Division 880 of the ITAA 1997, LCR 2020/3 provides at paragraph 54, that this phrase essentially means monies of a foreign government (or part of a foreign government) held 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.

Foreign Co and its assets are wholly owned by XX Country, and the primary purpose of establishing Foreign Co is to accumulate and effectively manage XX Country's natural resources and foreign currency assets for the benefit of social-economic progress of XX Country.

Foreign Co's revenue sources include capital contributions from ABC Co and revenues from the management of foreign assets in which Foreign Co has invested. The capital contributions from ABC Co represent revenue derived natural resources and agreements entered into on XX Country's behalf.

Therefore, Foreign Co is solely funded by public monies attributable to the Government of XX Country.

Therefore, this requirement is satisfied.

iii.                All returns on Foreign Co's investments are public monies

Foreign Co and its assets are wholly owned by XX Country. As such, the Government of XX Country is the beneficial owner of all the capital invested and all income that Foreign Co derives from that capital. Surplus income derived by Foreign Co is available for use by the Government of XX Country. Therefore, the monies will remain government monies.

Utilisation of Foreign Co's assets, including returns on Australian investments, is carried out in accordance with the program, which is to be approved each year through Presidential resolutions. Accordingly, Foreign Co's assets may be used for solving the most important nation-wide problems, as well as for construction and reconstruction of strategically significant infrastructure facilities, for the purpose of the country's socioeconomic development.

Foreign Co's assets may neither be used for lending to government bodies, public and non-public enterprises (organisations), as collateral for debts (commitments, guarantees) or other liabilities of any entity under the jurisdiction of XX Country.

Upon liquidation of Foreign Co, any remaining money and / or assets will remain assets of the Government of XX Country.

Therefore, all returns on Foreign Co's investments are public monies and will remain assets of the Government of XX Country.

Therefore, this requirement is satisfied.

iv.                Foreign Co is not a partnership

In accordance with the Statute, Foreign Co is an extra-budgetary state institution that is a separate legal entity and is wholly owned by the XX Country.

As such, Foreign Co is not a partnership.

Therefore, this requirement is satisfied.

v.   Foreign Co is 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' as:

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.

The term 'principal' is not defined and LCR 2020/3 states at paragraph 74 that the term takes its ordinary meaning having regard to the purpose and context in which it appears. The Macquarie Dictionary defines 'principal' as 'first or highest in rank, importance, value, etc.; chief, foremost...'.

The terms 'non-financial goods' and 'services that a not financial services' are also not defined, so should be given their ordinary meaning according to context and purpose.

The Explanatory Memorandum to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 (EM) provides the following guidance with regard to public non-financial entities:

4.27 Public non-financial entities include entities such as airline corporations, postal authorities, state water corporations and port authorities. They also include public non-profit institutions engaging in market production (such as hospitals, schools, or colleges) if they are separate institutional units and charge economically significant prices.

In addition to the example entities listed in the EM, LCR 2020/3 states at paragraph 76 that state electricity corporations and state mining corporations are also examples of public non-financial entities.

Foreign Co was established by Presidential Decree for the purpose of acting as a sovereign wealth fund. Foreign Co was established to accumulate and effectively manage XX Country's natural resource revenues and foreign currency assets for the benefit of social-economic progress of XX Country and to generate wealth for present and future generations. Therefore, the principal activity of Foreign Co for the purposes of subsection 880-130(1) of the ITAA 1997 is to invest and manage the funds of XX Country.

Foreign Co does not produce or trade non-financial goods and does not provide non-financial services. ABC Co exercises ownership over all natural resources in XX Country. ABC Co is wholly owned by XX Country and enters into agreements on behalf of XX Country. ABC Co transfers revenues received and fees collected from natural resources to Foreign Co as capital contributions.

Therefore, Foreign Co is not in the business of producing or trading non-financial goods and / or providing non-financial services.

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

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 EM provides the following guidance with regards to public financial entities:

4.28 Public financial entities include deposit-taking corporations, financial intermediaries (such as banks), financial auxiliaries and captive financial institutions.

Foreign Co does not actively trade in financial assets and liabilities, operate commercially in financial markets or provide any of the services listed in paragraph 880-130(2)(c) of the ITAA 1997. Therefore, Foreign Co is not a public financial entity under subsection 880-130(2) of the ITAA 1997.

Based on the relevant facts, Foreign Co satisfies the condition outlined in paragraph 880-125(d) of the ITAA 1997.

As Foreign Co satisfies each of the requirements in paragraphs 880-125(a) - (d) of the ITAA 1997, inclusive, it is reasonable to conclude that Foreign Co 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.

Foreign Co'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 EM, a 'return on' for the purposes of paragraph 880-105(1)(b) of the ITAA 1997 includes, but is not limited to:

•                    dividends - including non-share dividends and dividends that pass through a Managed Investment Trust (MIT)

•                    interest - including interest that passes through a MIT

•                    fund payments made by a MIT (other than fund payments to the extent that they are attributable to non-concessional MIT income, or would be non-concessional MIT income if certain provisions were disregarded, in accordance with subsection 880-105(3) of the ITAA 1997), and

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

The relevant test entities are listed at Appendix 1 to the facts and circumstances of this ruling and are equity investments in Australian resident companies listed on the ASX.

Foreign Co's investments are held through Custodian Co. Custodian Co has appointed sub-custodian Co as the Australian custodian for Foreign Co's investments. All assets are held by Sub-custodian Co to the order of Custodian Co.

Section 960-130 of the ITAA 1997 provides that an entity is a member of a company if it is a stockholder in the company, and section 960-135 of the ITAA 1997 further states:

If you are a member of an entity:

(a)          each interest, or set of interests, in the entity; or

(b)          each right, or set of rights, in relation to the entity;

by virtue of which you are a member of the entity, is a membership interest of yours in the entity.

Foreign Co's investments in the test entities are equity investments represented through shareholdings, which meet the requirement of being a membership interest as defined by the interaction of sections 960-130 and 960-135 of the ITAA 1997, and Foreign Co receives dividend payments and proceeds from any disposals of such shares.

Therefore, the returns that Foreign Co will receive from the Australian investments listed at Appendix 1 to the facts and circumstances of this ruling satisfy the requirements of paragraph 880-105(1)(b) of the ITAA 1997.

Test entities meet the requirements of paragraph 880-105(1)(c) of the ITAA 1997

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

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

•                    a managed investment trust in the income year in which the income time occurs.

The test entities, as listed at Appendix 1 to the facts and circumstances of this ruling, are Australian resident companies for Australian income tax purposes and it is expected that the test entities will continue to be Australian residents at the respective income times.

Therefore, the income received by Foreign Co will be from entities that satisfy the requirements of paragraph 880-105(1)(c) of the ITAA 1997.

Foreign Co's satisfies the portfolio interest test

For an amount of ordinary 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 entities at 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.

Subsection 880-105(4) of the ITAA 1997 contains the portfolio interest test and states:

Portfolio interest test

(4)          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 that 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.

'Sovereign entity group' is defined in section 880-20 of the ITAA 1997, which provides that each of the following is part of a sovereign entity group (member):

•                    a body politic of a foreign country or part of a foreign country

•                    a foreign government agency in relation to that foreign country or that part of that foreign country, and

•                    an entity in which an entity covered by either of the above holds a total participation interest of 100%, is not an Australian resident and is not a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Accordingly, sovereign entities of the same foreign government are members of the same sovereign entity group.

XX Country invests into Australia through Foreign Co, which hold less than 10% of the total shares on issue in each of the test entities listed at Appendix 1 to the facts and circumstances of this ruling.

Foreign Co's interest, and the sovereign entity to which it belongs, therefore satisfies the requirements of paragraph 880-105(1)(d) of the ITAA 1997.

Foreign Co's sovereign entity group satisfies the influence test

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

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

Influence test

(6)          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 the 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 that comprise 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 entities.

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.

LCR 2020/3 provides examples and guidance on the 'influence test' and states the following at paragraphs 11 to 13 with respect to sub-test 1:

11. Whether the relevant entity is able to determine the identity of (to settle or decide upon, to choose or appoint) one of those persons is a question of fact. The phrase 'able to' focuses on the relent entity's capacity or power. The sub-test is therefore not limited to situations where the entity has already determined, or intends to determine, the identity of one of the relevant decision makers. A right to determine will be sufficient for the requisite level of influence to exist.

12. The relevant entity will not be 'able to' determine, as a matter of fact, where it has irrevocably and unconditionally waived its rights by way of a legally enforceable agreement.

13. The sub-test also extends to situations where the relevant entity has the indirect capacity to determine the identity of one of the relevant decision makers. This may occur, for example, where the relevant entity controls another entity and that other entity holds the right to determine the decision-maker's identity.

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.

LCR 2020/3 provides the following guidance at paragraph 29 in respect of sub-test 2:

29. The three matters ('accustomed', 'obliged' or 'might reasonably be expected to') are not a composite phrase denoting a single test; they comprise different considerations each of which is sufficient to establish influence:

•                     Whether a person is 'accustomed' to act in accordance with the directions, instructions or wishes of the relevant entity requires an analysis of past facts. This necessitates an examination of any discernible pattern of the person following the directions, instructions or wishes given by the relevant entity.

•                     Whether a person is 'obliged' to act in accordance with the directions, instructions or wishes of the relevant entity depends upon a formal or informal obligation existing at the relevant time.

•                     Whether a person 'might reasonably be expected' to act in accordance with the directions, instructions or wishes of the relevant entity requires a prediction as to future events and a consideration as to the objective likelihood of those future events occurring. This requires a consideration of all of the facts and circumstances impacting upon the relationship between the two parties.

The following are relevant in determining whether Foreign Co's sovereign entity group satisfies the 'influence test' in respect of the test entities listed at Appendix 1 to the facts and circumstances of this ruling:

•                    neither Foreign Co, nor any member of its sovereign entity group, has the right to appoint a director to the Board of Directors of any of the test entities

•                    neither Foreign Co, nor any member of its sovereign entity group, hold the right to representation on any investor representative or advisory committees (or similar) of any of the test entities

•                    neither Foreign Co, nor any member of its sovereign entity group, has the ability to direct or influence the operation of any of the test entities outside of the ordinary rights conferred by the equity interest held

•                    Foreign Co's sovereign entity group's interest of less than 10% in each of the test entities does not provide it with an entitlement to either directly or indirectly determine the identity of any person who makes decisions that comprise the control and direction of any of the test entities' operations

•                    Foreign Co's sovereign entity group's interest of less than 10% does not provide Foreign Co or its sovereign entity group with the right to approve or veto decisions which contribute to the control or direction of any of the test entities

•                    neither Foreign Co, nor any member of its sovereign entity group, has any involvement in the day-to-day management of the business of any of the test entities

•                    neither Foreign Co, nor any member of its sovereign entity group, have the ability to exert actual or potential influence over the operations or investments of the test entities outside the ordinary rights conferred by the equity interest held, and

•                    Foreign Co and its sovereign entity group only hold rights to vote as a shareholder in proportion to its equity interest in the test entities.

Based on the above, it is reasonable for the Commissioner to conclude that neither Foreign Co, nor any member of its sovereign group, have influence over the test entities of the kind described in subsection 880-105(6) of the ITAA 1997.

In addition, it is reasonable for the Commissioner to conclude that Foreign Co and its sovereign entity group do not have influence over the test entities of the type set out in the examples of LCR 2020/3.

Therefore, Foreign Co and its sovereign entity group satisfy the requirements of paragraph 880-105(e) 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 such that amounts of ordinary and statutory income derived by Foreign Co from its investments in the test entities listed at Appendix 1 to the facts and circumstances of this ruling is not assessable and not exempt income.