Private ruling: Sovereign immunity
Date of advice: 10 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: May 2018

Ruling: Q1: Is ForCo immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investment in the units of AusTrust and the loans that it has made to AusTrust? | A1: Yes. | Q2: Is ForCo immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its investment in the shares of AusCo and the loans it has made to AusCo? | A2: Yes.

Relevant facts and circumstances: The Sovereign Fund 1. The Sovereign Fund is a sovereign wealth fund established in a foreign State to advance the objectives of the Government of the State and is recognised as a government authority of the State . 2. The funds used by the Sovereign Fund in all of its investments are reserve funds of the State. 3. The income generated by the Sovereign Fund on the investment of the State reserve funds is either re-invested or distributed to the Government of the State. 4. No distributions of income or gains from the Sovereign Fund have been made or can be made to any person other than the Government of the State. 5. The Sovereign Fund is resident in the State for income tax purposes and is not subject to income tax in the State. 6. The Sovereign Fund is not a tax resident in Australia. In particular, the Sovereign Fund has neither its central management and control in Australia nor is the Sovereign Fund’s voting power controlled by Australian residents. The Sovereign Fund Holding Structure 7. The Sovereign Fund is authorised to incorporate companies and establish investment enterprises, individually or with others, to invest in the State and abroad. 8. For the purposes of its investment in the Project, the Sovereign Fund has established the following entities: • HoldingCo • ForCo HoldingCo 9. HoldingCo is a company which was not incorporated in Australia. 10. HoldingCo is a wholly owned subsidiary of the Sovereign Fund. 11. HoldingCo is not tax resident in Australia and is not subject to income tax in the foreign State, whether directly or indirectly. 12. HoldingCo does not have a permanent establishment in Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). 13. HoldingCo owns 100% of ForCo. ForCo 14. ForCo is a company which was not incorporated in Australia. 15. ForCo was established by HoldingCo as a special purpose vehicle to invest in AusTrust and AusCo. 16. ForCo is not a tax resident of Australia nor does it have a permanent establishment in Australia under subsection 6(1) of the ITAA 1936. 17. ForCo owns xx% of the units in AusTrust and xx% of the issued shares in AusCo. 18. ForCo has also made securityholder loans to AusTrust and AusCo on ordinary commercial terms in proportion to its equity interests. AusTrust 19. AusTrust owns 50% of the shares in the head company of an Australian consolidated group for income tax purposes, which operates an active business. 20. As a unit holder in the AusTrust, ForCo entered into the Trust Investor Deed which sets out the rights and obligations of all of the investors in respect of AusTrust investment. 21. Under the Trust Investor Deed, the Board of AusTrust’s trustee company will have full power to direct and manage the activities of AusTrust. 22. Under the Trust Investor Deed, ForCo will have the right to appoint one Director to the Board of AusTrust’s trustee company. 23. ForCo has elected to irrevocably and unconditionally waive its rights in relation to the following matters under the Trust Investor Deed by entering into the Side Letter: ● Appointment of the Directors ● Removal of theDirectors 24. As ForCo has waived its right to appoint directors it will not vote on Board Reserved Matters. 25. Under the Trust Investor Deed, ForCo is entitled to appoint an Observer to the Board of AusTrust’s trustee company. An Observer is entitled to receive notice of and participate in Board Meetings to the same extent as Directors except that such Observers do not have the right to vote on any matter. 26. ForCo has irrevocably and unconditionally undertaken that any Observer appointed by it will only participate as an observer in the following capacity through a legally binding agreement: ● Will receive materials and information delivered to the Board, ● May attend Board Meetings, and ● May take notes during and receive minutes of Board Meetings. 27. Any observer appointed by ForCo to attend the Board meetings will have no voting rights with respect to Board matters, no right to table issues for discussion and no right to voice opinions or otherwise participate at a Board meeting, other than as outlined above. 28. In accordance with the Trust Investor Deed, an Investor Reserved Matter Resolution requires a vote in favour of the resolution by Investors holding, in aggregate, Investor Interests of not less than 90%. The effect of this is that ForCo can veto any resolutions relating to Investor Reserved Matters outlined in the Trust Investor Deed. AusCo 29. AusCo is the head of a consolidated group for income tax purposes which, with its subsidiaries, operate an active business. 30. As a shareholder in AusCo, ForCo entered into the AusCo Governance Deed (AGD) which sets out the rights and obligations of all of the investors in respect of the AusCo investment. 31. Under the AGD, ForCo will have the right to appoint one Director to the AusCo Board. 32. ForCo has elected to irrevocably and unconditionally waive its rights in relation to the following matters under the AGD through the AGD Side Letter: ● Appointment of the directors ● Removal of the directors 33. As ForCo has waived its right to appoint directors to the AusCo Board, it will not vote on Board Reserved Matters. 34. Under the AGD, ForCo is entitled to appoint an Observer to the AusCo Board. An Observer is entitled to receive notice of and participate in Board Meetings to the same extent as the Directors except that such Observers do not have the right to vote on any matter. 35. ForCo has irrevocably and unconditionally undertaken that any Observer appointed by it will only participate as an observer in the following capacity through a legally binding agreement: ● Will receive materials and information delivered to the Board, ● May attend Board Meetings, and ● May take notes during and receive minutes of Board Meetings. 36. Any observer appointed by ForCo to attend the AusCo Board Meetings will have no voting rights with respect to AusCo Board matters, no right to table issues for discussion and no right to voice opinions or otherwise participate at an AusCo Board meeting, other than as outlined above. 37. In accordance with the AGD, an Investor Reserved Matter Resolution requires a vote in favour of the resolution by Investors holding, in aggregate, Investor Interests of not less than 90%. The effect of this is that ForCo can veto any resolutions relating to Investor Reserved Matters outlined in the AGD.

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 doctrine of sovereign immunity applies to a foreign government 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 / 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 provide immunity from income and/or withholding tax in respect of Australian sourced income and gains, 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 or gains will not be subject to Australian income and/or withholding taxes. | Detailed Reasoning - Condition 1: Foreign government or an agency of a foreign government: The relevant entities have been established by the foreign State to advance the objectives of the foreign State and are owned by the State. Based on these facts and circumstances, it is accepted that the Sovereign Fund, HoldingCo and ForCo are agencies of the Government of the State for sovereign immunity purposes. | Detailed Reasoning - Condition 2: Moneys are and will remain government moneys: In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested are and will remain government monies. The funds used by the relevant entities in all of their investments are reserve funds of the State. The income generated by the relevant entities on the investment of the State reserve funds is either re-invested or distributed to the Government of the State. No distributions of income or gains have been made or can be made to any person other than the Government of the State. As such, it is accepted that the monies invested are and will remain government monies. | Detailed Reasoning - Condition 3: Non-commercial transaction: When determining whether the doctrine of sovereign immunity applies to provide immunity for Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish that the income or gain is being derived from a non-commercial activity. As noted in ATO Interpretive Decision ATO ID 2002/45 Withholding Tax: Sovereign Immunity (ATO ID 2002/45) whether an operation or activity is a commercial transaction will depend on the facts of each case. As a guide, a commercial transaction is generally considered to be an activity concerned with the trading of goods and services, such as buying, selling, bartering, transportation, and includes the carrying on of a business. On the other hand, 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. In relation to the ownership of shares in a company or other similar equity interests, there will be instances where the extent of the holding gives rise to questions as to whether the interests constitute a passive investment or a commercial investment. In all circumstances, consideration will be given to factors relating to the influence or control potentially able to be exercised by the investor (or a related party/associate of the investor) in relation to the investment. This includes (but is not limited to) any potential influence or control in relation to day to day management and key business, strategy and financial decisions. Given the proportion of ownership interest held, it is important to consider what influence it has over the decisions made amongst the investors members. ForCo, has elected to irrevocably and unconditionally waive its rights in relation to a number of matters under the Trust Investor Deed which would otherwise allow it to influence decisions pertaining to the operation of AusTrust. While it has retained rights to have an Observer attend board meetings, the Observer is forbidden to speak or vote during board meetings. Further, the Observer will not have input into the agenda of board meetings in advance of such meetings. ForCo will hold veto power in relation to Investor Reserved Matters which require a vote in favour of the resolution by Investors holding, in aggregate, not less than 90% of investor interests. The Commissioner accepts that the matters listed in as Investor Reserved Matters, over which ForCo would hold effective veto power, do not go beyond mere investor protection matters. Based on the facts and circumstances, the Commissioner accepts that the income or gains derived by ForCo from its investment in the AusTrust is from a non-commercial activity. Therefore, condition 3 has been satisfied. | Detailed Reasoning - Conclusion: ForCo is immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investment in AusTrust. | Detailed Reasoning - Question 2: As identified in the answer to question 1, the Commissioner accepts that ForCo is an agency of a foreign government and that the moneys being invested are and will remain government moneys. | Detailed Reasoning - Condition 3: Non-commercial transaction: ForCo, has elected to irrevocably and unconditionally waive its rights in relation to a number of matters under the AGD which would otherwise allow it to influence decisions pertaining to the operation of AusCo. While it has retained rights to have an Observer attend board meetings, the Observer is forbidden to speak or vote during board meetings. Further, the Observer will not have input into the agenda of board meetings in advance of such meetings. ForCo will hold veto power in relation to Investor Reserved Matters which require a vote in favour of the resolution by Investors holding, in aggregate, not less than 90% of investor interests. The Commissioner accepts that the matters listed in as Investor Reserved Matters, over which ForCo would hold effective veto power, do not go beyond mere investor protection matters. Based on the facts and circumstances, the Commissioner accepts that the income or gains derived by ForCo from its investment in AusCo is from a non-commercial activity. Therefore, condition 3 has been satisfied. | Detailed Reasoning - Conclusion: ForCo is immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investment in AusCo.