Private ruling: Sovereign immunity
Date of advice: 21 June 2017
Published: October 2017
Ruling period: Years ended XXXX to XXXX
Date scheme commenced: Year ended XXXX

Ruling: Q1: Will Entity A be immune from income and withholding taxes on: ● dividend income derived from Australian shares; and ● distributions from Australian real estate and property unit trusts 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 is managed and controlled by the foreign government. 3. Entity A was an agency set up to manage and invest moneys of the foreign government’s funds (the Funds) and state agencies. 4. The Funds and state agencies are owned by the foreign government. 5. Entity A’s holding in Australian shares, Australian real estate and property unit trusts and interest bearing securities are owned by the Funds and state agencies and ultimately by the foreign government. 6. Entity A’s holding of Australian shares and units in each Australian real estate and property unit trusts has at all times been less than 10% of the issued shares in each Australian company and of the issued units in each unit trust. 7. Entity A is not entitled to and has not appointed any director to the Board of Directors of any of the Australian companies or trustee/Responsible Entity of any Australian unit trust in which it holds shares or units. 8. The foreign government uses the income from the investments of moneys in the Funds and the state agencies to fund and support government functions.

Relevant legislative provisions: Income Tax Assessment Act 1936 S ection 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 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: Entity A is an agency of a foreign government. Entity A was created by legislation and has the responsibility of managing and investing the Funds and the funds of state agencies. The foreign government uses the income from the investments of moneys in the Funds and the state agencies to fund and support government functions. In view of the above, it is considered that the Entity A 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. Condition 2 – that the moneys invested are and will remain government moneys All moneys used to establish the Funds are moneys of the foreign government and the moneys used to establish the state agencies are moneys of the foreign government. The investments in Australia are owned by the Funds and state agencies and are ultimately owned by the foreign government. In view of the above, it is considered that the moneys invested by Entity A 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 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 the carrying on of a business. Entity A invests the Funds and manages the investments of the state agencies. The investments in Australia consist of shareholdings in Australian companies, units in Australian real estate and property unit trusts and Australian interest bearing securities held by the Funds and the state agencies. Entity A’s holding of shares in each Australian company and units in each Australian real estate and property unit trust have at all times been less than 10% of the issued shares in each Australian company and of the issued units in each Australian real estate and property unit trust. Entity A is not entitled to and has not appointed any director to the Board of Directors of any of the Australian companies or trustee/Responsible Entity of the Australian unit trust in which it hold shares or units. Thus Entity A has no authority or involvement in the operations of the companies or entities in which it invests. Therefore, Entity A’s investment activities in relation to the Australian investments are considered non-commercial activities. | Detailed Reasoning - Conclusion: As discussed above, the three conditions in relation to Entity A’s Australian investments are satisfied. Accordingly, Entity A will be immune from income and withholding taxes on dividends received from Australian shares and distributions received from Australian real estate and property unit trusts under the common law doctrine of sovereign immunity.