Private ruling: Sovereign Immunity
Published: August 2014
Ruling period: For the period from 1 July 2014 to 30 June 2015 | For the period from 1 July 2015 to 30 June 2016 | For the period from 1 July 2016 to 30 June 2017 | For the period from 1 July 2017 to 30 June 2018 | For the period from 1 July 2018 to 30 June 2019
Date scheme commenced: During the period from 1 July 2014 to 30 June 2015

Ruling: Q1: Is the entity entitled to an exemption from liability to withholding tax under the doctrine of sovereign immunity in respect of dividend income derived by its investments division from the entity's shareholdings in Australian resident companies where each shareholding constitute less than 10% of the total shares in the company and the entity is not represented on the board of directors of the companies? | A1: Yes | Q2: Is the entity entitled to an exemption from liability to withholding tax under the doctrine of sovereign immunity in respect of trust distributions received by the entity's investment division from the entity's Australian unit trust holdings where each unit holding constitute less than 10% of the total units in the unit trust and the entity is not represented on the board of directors of the trustee and/or the responsible entity of the unit trusts? | A2: Yes | Q3: Is the entity entitled to an exemption from liability to withholding tax under the doctrine of sovereign immunity in respect of interest income derived by the entity's investment division from the entity's Australian debt investments where the interest income is not derived as a result of the entity engaging in an active money lending business? | A3: Yes | Q4: Is the entity entitled to an exemption from liability to Australian income tax under the doctrine of sovereign immunity in respect of other income (including foreign exchange gains, capital gains and revenue gains) derived by the entity's investment division in connection with: (a) the entity's shareholdings in Australian resident companies where each shareholding is less than 10% of the total shares in the company and the entity is not represented on the board of directors of the companies; (b) the entity's Australian unit trust holdings where each unit holding constitute less than 10% of the total units in the unit trust and the entity is not represented on the board of directors of the trustee and/or the responsible entity of the unit trusts; (c) the entity's Australian debt investments where the interest income is not derived as a result of the entity engaging in an active money lending business; and (d) the entity's Australian derivative investments including spot FX and FX forwards, and listed and over-the-counter derivatives (futures, swaps, and options) where the derivative investments are entered into to hedge the investments outlined in (a), (b) and (c) above. | A4: Yes

Relevant facts and circumstances: The scheme, the subject of the Ruling, is described below. The Pension Plan (PP) and the entity The PP was established by the enactment of the Act. The PP is the foreign country's national statutory pension plan, created and managed by the government for the benefit of its contributors and beneficiaries. All amounts received by the government under the Act as or on account of contributions are paid into the Consolidated Revenue Fund (Consolidated Fund) and credited to the PP Account. This means that all contributions paid into the PP are required to be transferred to and held in a segregated account. All amounts payable under the Act are required to be paid out of the Consolidated Fund and charged to the PP Account. The entity is a foreign Crown corporation created by the Entity Act. The entity was established with a legislative mandate to: • assist the PP in meeting its obligations to contributors and beneficiaries under the PP; • manage amounts transferred to the entity pursuant to the Act in the best interests of PP contributors and beneficiaries; and • invest in assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the PP and its ability to meet its financial obligations on any given business day. Any amounts in credit of the PP Account that exceed the immediate obligations of the PP Account are required to be transferred to the entity to be managed and invested in accordance with the provisions of the Entity Act. Funds transferred to the entity are legally and beneficially owned by the entity and the funds are invested by the entity in its own capacity in accordance with the provisions of the Entity Act. An independent and professional Board of Directors approves investment policies, determines with management the organisation's strategic direction and makes critical operational decisions. However, investment policies and decisions must adhere to conditions set out in the Entity Act. The Board of Directors are appointed on the recommendation of the Minister. The Minister shall consult with the appropriate Ministers before making any recommendation. Pursuant to the Entity Act, the entity and its subsidiaries must not do anything inconsistent with the entity's objects nor exercise any powers contrary to the Entity Act. The chairperson of the entity is also appointed on the recommendation of the Minister after the Minister has consulted with the Board of Directors and the appropriate Ministers. The entity is accountable to the public and the foreign government parliament. The Act and the Entity Act can only be amended by an Act of Parliament. The entity and its wholly owned subsidiaries are residents of the foreign country for tax purposes and exempt from income tax in the foreign country. Australian investments The entity's investment division acts as an investor in global equity and debt exchanges, including Australian exchanges. The investment division invests in publicly traded equity and fixed income securities, including cash and derivatives markets. The entity's investment division's investment activities in Australia include common stocks, exchange traded funds, real estate investment trusts, term deposits, government bonds, spot FX, FX forwards, and listed and over-the-counter derivatives (futures, swaps, and options). The entity's investment division's Australian investments consist of: (a) the entity's shareholdings in Australian resident companies where each shareholding is less than 10% of the total shares in the company and the entity is not represented on the board of directors of the companies; (b) the entity's Australian unit trust holdings where each unit holding constitute less than 10% of the total units in the unit trust and the entity is not represented on the board of directors of the trustee and/or the responsible entity of the unit trusts; (c) the entity's Australian debt investments where the interest income is not derived as a result of the entity engaging in an active money lending business; and (d) the entity's Australian derivative investments including spot FX and FX forwards, and listed and over-the-counter derivatives (futures, swaps, and options) where the derivative investments are entered into to hedge the investments outlined in (a), (b) and (c) above. Dividend income, trust distributions, interest income and other income (including foreign exchange gains, capital gains and revenue gains) is derived by the entity's investment division from the abovementioned Australian investments.

Relevant legislative provisions: Not applicable

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. To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or an agency of a foreign government 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 or gain) 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 or gain 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 - a foreign government or an agency of a foreign government: The PP was established by the enactment of the Act. The PP is the country's national statutory pension plan, created and managed by the government for the benefit of its contributors and beneficiaries. The entity is a foreign Crown corporation created by the Entity Act. The entity was established with a legislative mandate to: • assist the PP in meeting its obligations to contributors and beneficiaries under the PP; • manage amounts transferred to the entity pursuant to the Act in the best interests of PP contributors and beneficiaries; and • invest in assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the PP and its ability to meet its financial obligations on any given business day. In view of the above, it is considered that the entity is an integral part of the foreign government's provision of retirement income function. Accordingly, the entity satisfies the condition that it is a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 2 - monies are and will remain government monies: All amounts received by the foreign government under the Act as or on account of contributions are paid into the Consolidated Fund and credited to the PP Account. This means that all contributions paid into the PP are required to be transferred to and held in a segregated account. All amounts payable under the Act are required to be paid out of the Consolidated Fund and charged to the PP Account. Any amounts in credit of the PP Account that exceed the immediate obligations of the PP Account are required to be transferred to the entity to be managed and invested in accordance with the provisions of the Entity Act. In view of the above, it is considered that the monies invested are and will remain the monies of a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 3 - non-commercial activity: An investment undertaken by a foreign government or an agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. However, it is necessary to establish whether the investment is non-commercial in nature and this will depend on the particular circumstances of the investment. The investment division's Australian investments consist of: (a) the entity's shareholdings in Australian resident companies where each shareholding is less than 10% of the total shares in the company and the entity is not represented on the board of directors of the companies; (b) the entity's Australian unit trust holdings where each unit holding constitute less than 10% of the total units in the unit trust and the entity is not represented on the board of directors of the trustee and/or the responsible entity of the unit trusts; (c) the entity's Australian debt investments where the interest income is not derived as a result of the entity engaging in an active money lending business; and (d) the entity's Australian derivative investments including spot FX and FX forwards, and listed and over-the-counter derivatives (futures, swaps, and options) where the derivative investments are entered into to hedge the investments outlined in (a), (b) and (c) above. Dividend income, trust distributions, interest income and other income (including foreign exchange gains, capital gains and revenue gains) is derived by the entity's investment division from the abovementioned Australian investments. In view of the above, it is considered that the entity's Australian investments are non-commercial. | Detailed Reasoning - Conclusion: As discussed above, the three conditions are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, the entity will be exempt from: 1. liability to withholding tax in respect of dividend income derived by its investments division from the entity's shareholdings in Australian resident companies where each shareholding constitute less than 10% of the total shares in the company and the entity is not represented on the board of directors of the companies; 2. liability to withholding tax in respect of trust distributions received by the entity's investment division from the entity's Australian unit trust holdings where each unit holding constitute less than 10% of the total units in the unit trust and the entity is not represented on the board of directors of the trustee and/or the responsible entity of the unit trusts; 3. liability to withholding tax in respect of interest income derived by the entity's investment division from its Australian debt investments where the interest income is not derived as a result of the entity engaging in an active money lending business; and 4. liability to Australian income tax in respect of other income (including foreign exchange gains, capital gains and revenue gains) derived by the entity's investment division in connection with: (a) the entity's shareholdings in Australian resident companies where each shareholding is less than 10% of the total shares in the company and the entity is not represented on the board of directors of the companies; (b) the entity's Australian unit trust holdings where each unit holding constitute less than 10% of the total units in the unit trust and the entity is not represented on the board of directors of the trustee and/or the responsible entity of the unit trusts; (c) the entity's Australian debt investments where the interest income is not derived as a result of the entity engaging in an active money lending business; and (d) the entity's Australian derivative investments including spot FX and FX forwards, and listed and over-the-counter derivatives (futures, swaps, and options) where the derivative investments are entered into to hedge the investments outlined in (a), (b) and (c) above.