Private ruling: Sovereign Immunity
Date of advice: 18 December 2015
Published: March 2016
Ruling period: Years ended XXXX to XXXX
Date scheme commenced: During the year ended XXXX.

Ruling: Q1: Will Company D, as the trustee of the Trust, be immune from interest withholding tax on interest income received by it under the common law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: 1. Entity A is a statutory body incorporated under the statute of a foreign government. 2. Entity A is a body corporate with full capacity to act on behalf of the foreign government, with the power to acquire, purchase, take, hold and enjoy movable and immovable property and dispose of, or deal with, the property as it sees fit. 3. The statute of the foreign government states that the President may vest in Entity A any property currently being vested in a public officer or authority, and vice versa. 4. Company A is a foreign resident company. 5. The immediate holding company of Company A is Company B and the ultimate holding company of Company A is Company C. Both Company B and Company C were incorporated in a foreign country. 6. Company D is a resident of a foreign country for tax purposes and a wholly-owned subsidiary of Company B. 7. Companies A, B, C and D are companies wholly-owned, directly and indirectly, by Entity A. 8. Company A is the sole unit holder of the Trust and Company D is the trustee of the Trust. The Trust is not a resident of Australia for income tax purposes. 9. The funds used by the Trust to make investments form part of the reserves of the foreign government. 10. Company D, as the trustee of the Trust, entered into a debt investment agreement (the Agreement) with Entity X, an Australian resident. Under the Agreement the Trust will provide a loan to Entity X. 11. The loan is required to be repaid in full. Interest is payable to the Trust on the loan. 12. Certain clauses of the Agreement provide protection to the Trust in relation to its debt investment. 13. Under the Agreement no control element or voting rights will be acquired by the Trust in the business of Entity X. 14. The Trust does not hold any other investments. 15. The Trust does not engage in commercial activities such as trading of goods and services, buying, selling or bartering, including carrying on a business.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 128B

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 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 a statutory body incorporated under the statute of a foreign government. Entity A is a body corporate with full capacity to act on behalf of the foreign government, with the power to acquire, purchase, take, hold and enjoy movable and immovable property and dispose of, or deal with, the property as it sees fit. The Trust and Company D are indirectly wholly-owned by Entity A and is being used by Entity A to make investments. In view of the above, it is considered that Company D, as the trustee of the Trust, 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 The statute of the foreign government states that the President may vest in Entity A any property currently being vested in a public officer or authority, and vice versa. Thus the property which is vested in Entity A remains the property of the government, as the property is ultimately controlled by the President. Furthermore, the funds used by the Trust to make investments form part of the foreign reserves of the foreign government. In view of the above, it is considered that the moneys invested by Company D, as the trustee of the Trust, 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: Interest income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments is generally not considered to be income derived from a commercial operation or activity. In determining whether the Trust's debt investment in Australia, through a loan being made to Entity X, constitutes non-commercial activity, it is necessary to consider the nature and extent of the investment. In this regard the following matters are considered relevant: • The loan is required to be repaid in full. Interest is payable to the Trust on the loan. • Certain clauses of the Agreement provide protection to the Trust in relation to its debt investment. • Under the Agreement no control element or voting rights will be acquired by the Trust in the business of Entity X. • The Trust does not hold any other investments. • The Trust does not engage in commercial activities such as trading of goods and services, buying, selling or bartering, including carrying on a business. In view of the above, it is accepted that the loan by Company D, as the trustee of the Trust, to Entity X constitutes an interest bearing investment and thus a non-commercial activity. | Detailed Reasoning - Conclusion: As discussed above, the three conditions in relation to the loan held by Company D, as the trustee of the Trust, are satisfied. Accordingly, pursuant to the doctrine of sovereign immunity, Company D, as the trustee of the Trust, will be immune from interest withholding tax on interest income received on the loan made to Entity X.