Private ruling: Sovereign Immunity
Date of advice: 15 December 2015
Published: March 2016
Ruling period: Years ended 30 June XXXX to XXXX
Date scheme commenced: During the year ended 30 June XXXX.

Ruling: Q1: Will Entity B be immune from income and withholding taxes on: • Interest received on loans advanced to Entity G; • Distributions received from Entity B's interest in Entity D; • Any gains made by Entity B on the disposal of its interest in Entity D, under the common law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: 1. Entity A was established by a foreign government in accordance with a statute. 2. Entity A was established with moneys of the foreign government and continues to receive and pay moneys to the foreign government. 3. Entity A is managed and controlled by the foreign government. 4. Entity A and its assets are wholly-owned by the foreign government. 5. Entity B is a special purpose company established by A to make offshore investments. 6. All shares in Entity B are owned by Entity A. 7. Entity C is an offshore company indirectly controlled by Entity A. 8. All shares in Entity C are owned by Entity B. 9. Entity D is wholly-owned by Entity B which is indirectly subject to the statute of Entity A. Money invested by Entity D is sourced from Entity A's funds. 10. Entities A, B, C and D are not residents of Australia, as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). 11. Entity D owns shares and units in Entities E, F, G and H, being Australian entities from which it receives distributions. Entity D will also make gains on the disposal of these interests. Entity D will make distributions to Entity B. 12. Entity B and Entity D may also advance loans to Entity G. The loans do not create any special rights for Entities A, B C or D that would allow them to influence the business conducted by Entities E, F, G and H. The loans are also not convertible into an ownership interest in Entity E, F, G or H. 13. The loan agreement for the above mentioned loans will not in any way have an impact on the terms and conditions of the security holder's deed. 14. Entity C and Entity D are entitled to, but will not, appoint a director to the Board of Directors (Board) of any of the Australian entities in which they hold an interest. Entity D has appointed an observer to the Board of Entities E, F, G and H. An observer has no voting rights. 15. Entities A, B, C and D are not involved in the day to day management of the business of Entities E, F, G and H. Entities A, B, C and D are also unable to influence the Board decisions of the Entities. E, F, G and H. 16. Neither Entity B nor Entity D is in the business of money lending.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1

Reasons for decision: Summary: For Australian income tax and withholding tax purposes it is accepted that the common law doctrine of sovereign immunity applies to foreign governments 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 being invested are and will remain government moneys, and 3. that the income is being derived from a non-commercial activity. If these three conditions are satisfied, the Australian sourced income and/or gains will not be subject to Australian income and/or withholding taxes. | 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: Entity A was established by a foreign government in accordance with a statute. Entity B is a company that is wholly-owned, controlled and used by Entity A to make investments and is therefore indirectly subject to the statute of Entity A. The board of directors of Entity B are appointed by Entity A and operate under the direction of Entity A and the foreign government. In view of the above, it is considered that Entity B meets the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 2 - that the moneys invested are and will remain government moneys: Entity A was established with moneys of the foreign government and continues to receive and pay moneys to the foreign government. Entity A is managed and controlled by the foreign government. Entity A and its assets are wholly-owned by the foreign government. Money invested by Entity B is sourced from Entity A's funds as Entity B is a wholly-owned by Entity A. The funds Entity B has invested in Entity D and will lend to Entity G are the property of Entity A and the foreign government. Any income received by entity B will remain the moneys of the foreign government. In view of the above, it is considered that the moneys invested and lent by Entity B, are and will remain the moneys of the foreign government. Therefore, this condition is satisfied. | 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 interest bearing investments or investments in equities is generally not considered to be income derived from a commercial operation or activity. However, in relation to the holding of shares in a company, or units in a unit trust, the extent of the relevant holding may give rise to questions as to whether it constitutes a commercial activity, which includes the carrying on of a business. In determining whether the income or gains distributed to Entity B by Entity D are derived from a non-commercial activity it is necessary to consider the nature of Entity D's investment including the extent of its holding and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of the Head Entities. Entities A, B, C and D are not involved in the day to day management of the business of Entities E, F, G and H. Entity C and Entity D are entitled to, but will not, appoint a director to the Board of any of the Australian entities in which they hold an interest. Entity D has appointed an observer to the Board of Entities E, F, G and H. An observer has no voting rights. Entity B & Entity D may make loans to Entity G. The loans do not create any special rights for Entity B or Entity D that would allow it to influence the business conducted by Entities E, F, G and H. Further, the loans are also not convertible into an ownership interest in Entities E, F, G and H. Neither Entity B nor Entity D is in the business of money lending and they will only have ordinary creditors' rights in relation to the loan provided to Entity G. It is accepted that the loan provided by Entity B to Entity G is a passive interest bearing investments which constitutes a non-commercial activity. It is also accepted that Entity D's holdings in Entities E, F, G and H constitutes a non-commercial activity. Further, it is considered that when viewed together, Entity D's combined investment (comprised of its holdings in Entities E, F, G and H and the loans to Entity G) is also non-commercial in nature. In addition, it is accepted that any capital gains made by Entity B on the disposal of its investment in Entity D is derived from a non-commercial activity. | Detailed Reasoning - Conclusion: As discussed above, the three conditions in relation to Entity B's investment are satisfied. Entity B will be immune from income and withholding tax on interest received on loans advanced to Entity G, distributions received from Entity D and any gains on the disposal of its interest in Entity D under the common law doctrine of sovereign immunity.