Private ruling: Exemption from liability to income tax
Published: July 2012
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is the foreign government entity entitled to an exemption from liability to income tax including withholding tax under the common law principle of sovereign immunity? | A1: 1. Yes. The foreign government entity is entitled to an exemption from liability to income tax including withholding tax under the common law principle of sovereign immunity

Relevant facts and circumstances: The foreign government entity was established for the purpose of investing amounts under its memorandum with a view to achieve a maximum rate of return.

Relevant legislative provisions: Subsection 15-15(2) of Schedule 1 to the Taxation Administration Act 1953

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. An activity undertaken by a foreign government entity will generally be accepted as the performance of governmental functions provided that it is functions of government, provided that the entity is owned and controlled by the government and does not engage in commercial activities. When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature. Whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, as a guide, a commercial activity is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business. 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. Accordingly, provided the funds used to make such investments are and remain government moneys, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity. In relation to a holding of shares in a company, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or the carrying on of a business, but this would depend on the particular circumstances. A portfolio holding in a company (that is, a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax. To establish that sovereign immunity applies to exempt Australian sourced income from income tax including withholding tax, it is necessary to establish the following: · that the person making the investment (and therefore deriving the income) is a foreign government or an entity of a foreign government; · that the moneys being invested are and will remain government moneys; and · that the income is being derived from a non-commercial activity. If these three conditions are satisfied, then the income will not be subject to Australian income or withholding taxes. The doctrine of sovereign immunity only applies to foreign governments and their instrumentalities that engage in governmental functions. In determining whether a particular activity constitutes the performance of governmental functions we need to examine the nature of the activity conducted by the foreign government or its instrumentality. 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. The foreign government entity is engaged in exercising governmental functions and therefore is eligible for exemption from Australian income and withholding taxes in relation to income received. | Detailed Reasoning - Condition 1 - Person making the investment is a foreign government or an entity of a government: Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. An activity undertaken by a foreign government entity will generally be accepted as the performance of governmental functions provided that it is functions of the government, provided that the entity is owned and controlled by the government and does not engage in commercial activities. | Detailed Reasoning - It is therefore a requirement that:: 1. The government entity fund is performing governmental functions 2. Owned by the government 3. Controlled by the government | Detailed Reasoning - 1. Performance of governmental functions: The foreign government entity's functions are contained in its memorandum of association | Detailed Reasoning - Owned by the Government: The foreign government entity was established by its articles of association | Detailed Reasoning - Controlled by the Government: The directors of the foreign government entity are appointed on the recommendation of the Minister of Finance. The independent board decides or approves investment policies and decisions. However, these investments must adhere to the conditions set out in the entity's articles. The foreign government entity is accountable to the it's governing body | Detailed Reasoning - 2. The moneys being invested are and will remain government moneys: The following features indicate that the moneys being invested are and will remain government money. The features show that the moneys invested is sourced from public moneys. | Detailed Reasoning - 3. The income is being derived from a non-commercial activity: The foreign government entity has non-portfolio investments in Australia. The income that is the subject of the ruling request only includes portfolio investments which is considered passive income and non-commercial in nature. The foreign government entity is not engaged in an active money lending business but it may in future derive non passive Australian income which will not be subject to exemption. | Detailed Reasoning - Conclusion: Accordingly, the foreign government entity is considered to be engaged in exercising governmental functions whereby the moneys being invested are and will remain government moneys, and the income being derived is that of a non-commercial activity. Therefore, the foreign government entity is eligible for an exemption from liability to Australian income and withholding taxes in respect of its portfolio investments under the common law principle of sovereign immunity.