Private ruling: Sovereign Immunity
Date of advice: 27 November 2015
Published: February 2016
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: During the year ending 30 June 2015

Ruling: Q1: Are income and capital gains to which the entity is beneficially entitled in respect of its investment in the Australian entities immune from income tax and withholding tax under the common law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: 1. The non-resident entity is a government corporation of a foreign state. 2. The government is responsible for appointing all members of the non-resident entity's board of directors. 3. The investments subject to this ruling involve the investment of monies contained in segregated funds within the non-resident entity's assets (the Funds). 4. The non-resident entity entered into an agreement with a non-resident investment manager to invest the Funds to increase the non-resident entities long-term value. 5. Under the agreement the non-resident investment manager manages the Funds for the non-resident entity and is the legal owner of the Funds as custodian for the non-resident entity such that the non-resident entity is the beneficial owner of the Funds. 6. The investments made by the non-resident entity through the non-resident investment manager are accounted for separately from the other investments the non-resident investment manager has made on behalf of other entities into the infrastructure funds. 7. Under the agreement, the government may demand payments of the profits from the investment by giving reasonable prior notice to the non-resident investment manager. If the government does not make a demand for payment, the non-resident investment manager may reinvest the amounts on behalf of the non-resident entity within the terms of the agreement. 8. The non-resident entity through the non-resident investment manager invests the Funds for the purposes of funding governmental functions. 9. The non-resident entity has invested in infrastructure funds in Australia. 10. The non-resident entity's investments in the infrastructure funds are to be no more than 2% of the units of the infrastructure funds. 11. The non-resident investment manager's total investment as an investment manager in the infrastructure funds does not exceed 6% of the total units in the infrastructure funds. 12. The non-resident entity will derive trust, dividend, interest and other income from its investments, and gains from disposal of the investments. 13. The non-resident entity and non-resident investment manager have no influence or involvement in the management of the entities in which it invests. They have no presence on any board or committee and are not able to call board or committee meetings.


Reasons for decision: Detailed Reasoning - 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 engage 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. | Detailed Reasoning - 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 non-resident entity is a government corporation of a foreign state . The government is responsible for appointing all members of the non-resident entity's board of directors. Pursuant to section 22 of the Foreign States Immunities Act 1985 (Immunities Act) sovereign immunity extends to a 'separate entity' of a foreign state. A separate entity of a foreign state is defined in section 3 of the Immunities Act to be a natural person, body corporate or corporation sole that: • is an agency or instrumentality of the foreign state, and • is not a department or organ of the executive government of the foreign state. As outlined above the non-resident entity is a 'separate entity' of a foreign state, therefore, satisfying this condition. Condition 2 - that the moneys invested are and will remain government moneys The investments subject to this ruling involve the investment of monies contained in segregated funds within the non-resident entity's assets. The non-resident investment manager manages the Funds for the non-resident entity and is the legal owner of the Funds as custodian for the non-resident entity such that the non-resident entity is the beneficial owner of the Funds. The non-resident entity is absolutely entitled to the income derived from the investments. The income received may include trust distributions, dividend income, interest income, and capital gains on the disposal of the units in the infrastructure funds. The investments made by the non-resident entity through the non-resident investment manager are accounted for separately from the other investments the non-resident investment manager has made on behalf of other entities into the infrastructure funds. Therefore there is no mixing of the Funds with the monies of other entities. Under the agreement, the government may demand payments of the profits from the investment by giving reasonable prior notice to the non-resident investment manager. If the government does not make a demand for payment, the non-resident investment manager may reinvest the amounts on behalf of the non-resident entity within the terms of the agreement. The above factors confirm that the monies invested by the non-resident entity through the non-resident investment manager are and will remain government monies. | Detailed Reasoning - 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 investments in equities is generally not considered to be income derived from a commercial operation or activity. However the extent of the relevant holding may, depending on the circumstances, give rise to questions as to whether it constitutes a passive investment or commercial activity. Factors that require consideration include the extent of voting interests in the entity, the degree of actual or potential influence able to be exercised in respect of the financial, operating and policy decisions made in respect of the entity. ATO Interpretive Decision ATOID 2002/45: Withholding Tax: Sovereign Immunity states that a holding of 10% or less of the equity in a company will generally be accepted as a passive investment, and therefore a non-commercial activity. Although the Commissioner only refers to shares in a company, there is no reason why this view would be any different in the event of holding units in a trust. The non-resident entity, through the non-resident investment manager, will have an investment, when fully drawn, of at most 2% of units held in the infrastructure funds separately. The non-resident investment manager's total investment as an investment manager does not exceed 6% of the total units in the infrastructure funds. Therefore the extent of the holding does not give rise to questions as to whether it constitutes a passive investment or commercial activity. In addition, the non-resident entity has no influence or involvement in the management of the infrastructure funds. It does not sit on any board or committee and is not able to call board or committee meetings. Unit holders in the infrastructure funds only hold general voting rights in relation to structural aspects of the funds. The non-resident investment manager has no influence or involvement in the management of the infrastructure funds. It does not sit on any board or committee and is not able to call board or committee meetings. The above factors support the conclusion that the non-resident entity's investments into the infrastructure funds are passive investments, and therefore non-commercial activities, satisfying this condition. | Detailed Reasoning - Conclusion: As outlined above, the three conditions in relation to the non-resident entity's investment through the non-resident investment manager in the infrastructure funds are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, the non-resident entity will be immune from income and withholding taxes on trust distributions, interest income, dividend income and capital gains on disposal of the units in the infrastructure funds under the common law doctrine of sovereign immunity.