Private ruling: Sovereign immunity
Date of advice: 14 May 2018
Published: July 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: XX July 20XX

Ruling: Q1: Is the non-resident entity immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from: (a) its Australian investments listed in Appendix 1 of the relevant facts and circumstances of this Ruling, and (b) its future investments in Australia when made within the parameters contained in paragraphs 17 and 18 of the relevant facts and circumstances of this Ruling. | A1: Yes.

Relevant facts and circumstances: 1. The non-resident entity was established by a foreign government under Law. It is an agency of a foreign government. 2. The non-resident entity is exempt from all taxes in its country of residence. 3. The non-resident entity’s head office is located in a country that is not Australia. 4. The nature of non-resident entity as outlined by the Law is to be a public legal entity, endowed with administrative and financial autonomy and of its own capital. 5. The Law of the non-resident entity outlines the functions of the non-resident entity. These functions include: to inform the National Parliament, Government and the public about its policies, functions and operations as specified in the present law; and to advise the Government on matters within its field of competence; to enter into contracts and establish agreements and protocols with national or foreign entities, public or private. 6. The Law of the non-resident entity outlines the relationship with the Government of the non-resident entity’s country of residence. 7. The Law of the non-resident entity details the governance and organisation of the non-resident entity. The organs of the non-resident entity are the Governor and the Governing Board. 8. The Law of the non-resident entity detail the powers, remuneration, eligibility, removal and resignation provisions for the Governor and Governing Board. 9. The Law of the non-resident entity states provisions for the capital of the non-resident entity. 10. The Law of the non-resident entity outlines that the net profit of the non-resident entity after statutory deductions shall be transferred to the Government. 11. The Law of the non-resident entity outlines the management of special funds. 12. The Law of the non-resident entity outlines the types of foreign assets that the non-resident entity may hold in its investment portfolio, which includes readily-marketable debt securities. 13. The Australian investments of the non-resident entity are listed in Appendix 1 of the relevant facts and circumstances of this Ruling. 14. All of the equity investments detailed in Appendix 1 of the relevant facts and circumstances of this Ruling have the following characteristics: a) Listed on the Australian Securities Exchange (‘ASX’) or another recognised stock exchange b) The non-resident entity, along with any related party, has a combined holding of less than 10% of the equity securities of the issuer c) Neither the non-resident entity, nor any related party, has any involvement in the day to day management of the issuing entity’s business d) Neither the non-resident entity, nor a related party, has any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the non-resident entity may have acquired units e) Neither the non-resident entity, nor a related party, has any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and f) The non-resident entity, along with any related party, has rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. 15. The debt investments listed in Appendix 1 of the relevant facts and circumstances of this Ruling are Australian Commonwealth Government Bonds. 16. These debt investments have the following characteristics: a) The debt securities provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business b) All debt securities have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange c) The debt securities have broad financial covenants, and do not allow the non-resident entity to have any influence or control over the debt issuer’s management. The covenants are in accordance with industry standard d) The debt securities do not provide any right or option for conversion to equity at any time, and e) The non-resident entity has not negotiated the terms of the debt securities and has purchased them on a standard basis as part of a public offering. 17. The non-resident entity will make further equity investments into Australia, including potential investments into Managed Investment Trusts (‘MITs’), that will conform with the following parameters: a) All securities will be listed on the ASX or another recognised stock exchange b) The non-resident entity, along with any related party, will have a combined holding of less than 10% of the equity securities of the issuer c) Neither the non-resident entity, nor any related party, will have any involvement in the day to day management of the issuing entity’s business d) Neither the non-resident entity, nor a related party, will have any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the non-resident entity may acquire units e) Neither the non-resident entity, nor a related party, will have any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and f) The non-resident entity, along with any related party, will only have rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. 18. The non-resident entity will make further debt investments in Australia that will conform with the following parameters: a) The debt securities will provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business b) All debt securities will have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange c) The debt securities will have broad financial covenants, and will not allow the non-resident entity to have any influence or control over the debt issuer’s management. The covenants will be in accordance with industry standard d) The debt securities will not provide any right or option for conversion to equity at any time, and e) The non-resident entity will not negotiate the terms of the debt securities and will purchase them on a standard basis as part of a public offering.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1 | Income Tax Assessment Act 1997 section 995-1

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 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 provide immunity from Australian income tax and/or withholding tax on 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 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. Condition 1: A foreign government or agency of a foreign government As the non-resident entity is not a foreign government, it is required to be an agency of a foreign government in order to satisfy this requirement. In the context of sovereign immunity, it is considered that an entity which is wholly owned by a foreign government is an ‘agency of a foreign government’ where that entity is performing a function for the public advantage and executes a function in the public interest and is not a private body established for private profit. The Law provides for the nature of the non-resident entity as a public legal entity, endowed with administrative and financial autonomy and of its own capital. The Law states the functions of the non-resident entity. The Governing Board is the supreme governing board of non-resident entity. The Governing Board is charged with the formulation and supervision of the implementation of policies, and supervision of the non-resident entity’s administration and operations. The Governor is the chief executive of the non-resident entity and is in charge of the non-resident entity’s daily operations. The Commissioner accepts that the non-resident entity is an agency of a foreign government as it is performing a function in the interests of the public. Given the above factors, the non-resident entity satisfies this requirement. Condition 2: The monies being invested are and will remain government monies 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 Law states that the capital of the non-resident entity shall be held solely by the State. The Law of the non-resident entity outlines that the net profit of the non-resident entity after statutory deductions shall be transferred to the Government. All income and gains from the investments that are subject of this ruling, being income or gains from the investments of the non-resident entity, belong to the Government. It is considered that the money being invested by the non-resident entity is and will remain government money. Given the above factors, the Commissioner accepts that the non-resident entity satisfies this requirement. Condition 3: 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 , 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. A passive investment is more likely to be considered a non-commercial transaction. 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. The non-resident entity holds a number of investments in Australia, these consist of; ● Debt securities (including government bonds), and ● Listed equities (including company shares). The full list of investments held by the non-resident entity is detailed in Appendix 1 of the relevant facts and circumstances of this Ruling. The following factors are relevant as to determining whether the non-resident entity’s equity investments in Australia were commercial activities: ● All the investments were listed on the ASX or another recognised stock exchange ● The non-resident entity held less than 10% of the equity securities of the issuer ● The non-resident entity did not have involvement in the day to day management of the issuing entity’s business ● The non-resident entity did not have rights to representation on the board of an equity issuer ● The non-resident entity did not have rights to representation on any investor representative or advisory committee (or similar) of any equity issuer ● The non-resident entity only had rights to vote as a shareholder in proportion to its equity interest in the relevant entity, and ● The non-resident entity did not carry on a business of securities trading. Its intention was to hold securities for the purpose of deriving distribution income. The following factors are relevant as to determining whether the non-resident entity’s debt investments in Australia were commercial activities: ● The debt securities provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business ● All debt securities have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange ● The debt securities have broad financial covenants, and do not allow the non-resident entity to have any influence or control over the debt issuer’s management. The covenants are in accordance with industry standard ● The debt securities do not provide any right or option for conversion to equity at any time, and ● The non-resident entity has not negotiated the terms of the debt securities and has purchased them on a standard basis as part of a public offering. Based on the above factors, the Commissioner accepts that the non-resident entity’s investments outlined in Appendix 1 of the relevant facts and circumstances of this Ruling are passive investments, and non-commercial activities, satisfying this condition. The following factors are relevant as to determining whether further equity investments into Australia, including potential investments into MITs, will be commercial activities: ● All securities will be listed on the ASX or another recognised stock exchange ● The non-resident entity, along with any related party, will have a combined holding of less than 10% of the equity securities of the issuer ● Neither the non-resident entity, nor any related party, will have any involvement in the day to day management of the issuing entity’s business ● Neither the non-resident entity, nor a related party, will have any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the non-resident entity may acquire units ● Neither the non-resident entity, nor a related party, will have any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and ● The non-resident entity, along with any related party, will only have rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. The following factors are relevant as to determining whether further debt investments in Australia will be commercial activities: ● The debt securities will provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business ● All debt securities will have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange ● The debt securities will have broad financial covenants, and will not allow the non-resident entity to have any influence or control over the debt issuer’s management. The covenants will be in accordance with industry standard ● The debt securities will not provide any right or option for conversion to equity at any time, and ● The non-resident entity will not negotiate the terms of the debt securities and will purchase them on a standard basis as part of a public offering. Given the above factors, the Commissioner accepts that any prospective investments which are made within the parameters in paragraphs 17 and 18 of the relevant facts and circumstances of this Ruling, satisfy this third condition in relation to the application of the common law doctrine of sovereign immunity. | Detailed Reasoning - Conclusion: As the three conditions have been satisfied, the non-resident entity is immune from Australian income tax and withholding tax on all income and gains derived from its investments in Australia as outlined in Appendix 1 of the relevant facts and circumstances of this Ruling under the common law doctrine of sovereign immunity. The non-resident entity will also be immune from Australian income tax and withholding tax on all income and gains derived with respect to future investments made within the parameters contained in paragraphs 17 and 1 8 of the relevant facts and circumstances of this Ruling.