Private ruling: Sovereign Immunity
Published: June 2013
Ruling period: On or after 1 January 2012 - 1 January 2016
Date scheme commenced: On or after 1 January 2012

Ruling: Q1: Will the income and capital gains derived in Australia by a non-resident company from its passive investment in Australia be exempt from income tax, including withholding tax, under the common law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: A non-resident company (the Company) was established by a foreign government to hold investments in Australia. The Company, its immediate holding company and its parent company are all wholly owned by a statutory body corporate established under an enactment of the foreign government to own and administer assets of that foreign government. Australian investment The Company acquired an equity interest in an Australian entity listed on the Australian Securities Exchange. The Company has the ability to appoint a representative (Representative) to the Board of the Australian entity it has invested in when its interest in the Australian entity exceeds X%. As from 20XX the Company has not had a Representative on the Board of the Australian entity. Other activities and investments The Company does not engage in commercial activities such as trading of goods and services, buying, selling, bartering and transportation or carrying on a business. The Company does not hold any other investments at present.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: While the taxation legislation itself does not provide an exemption specifically for foreign governments, the Australian government recognises the common law doctrine of sovereign immunity. Certain income derived from within Australia by foreign governments or agencies of foreign governments from the performance of government functions within Australia will be exempt from Australian tax under the common law doctrine of sovereign immunity. Activities undertaken by agencies of a foreign government will generally be accepted as the performance of governmental functions provided that the foreign government agencies are owned and controlled by the government and do not engage in ordinary commercial activities. 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. In summary, and as stated in ATO Interpretative Decision ATO ID 2002/45 (ATO ID 2002/45) in relation to establishing that sovereign immunity applies to exempt certain income from withholding tax, it is necessary to establish the following to determine if sovereign immunity applies: · that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government; · that the moneys being invested are and will remain government moneys; and · that the income is being derived from a non-commercial activity. Consideration will be given to how each of these requirements, in turn, applies in this case. 1. That the person making the investment (and therefore deriving the income and capital gains) is a foreign government or an agency of a foreign government. The Company, itself, is not a foreign government. Therefore, it will be necessary to consider whether it is an 'agency of a foreign government'. An 'agency of a foreign government' is not defined. However, subsection 995-1(1) of the Income Tax Assessment Act 1997 provides that a foreign government agency is: (a) the government of a foreign country or part of a foreign country; (b) the authority of the government of a foreign country; or (c) the authority of the government of part of a foreign country. In the context of sovereign immunity, we consider that an entity that is wholly owned by a foreign government is an 'authority' 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 exclusively for private profit. The Company, which is indirectly and ultimately wholly owned by the foreign government, acts as a special purpose vehicle for the foreign government to make investments in Australia in the management of the foreign reserves. The management of the foreign reserves of a country is a function for the public advantage or public interest and is not a function exclusively for private profit. Therefore, the Company acts as an 'authority' of the government. Accordingly, the Company is considered to be an 'agency of a foreign government'. 2. That the moneys being invested are and will remain government moneys The funds used by the Company to invest in the Australian entity are sourced from the foreign reserves of the foreign government and will remain so for the period that the Company holds the investment. The money is being invested for the purpose of preserving and enhancing the foreign government's foreign reserves. All income derived from the Australian investment will be used to fund and support governmental functions of the foreign government. As stated in the related ruling application lodged by Company, these reserves provide a stream of returns that can be spent or invested for the benefit of present and future generations of the foreign government, that is, for the public advantage and in the public interest, not for a private profit. Accordingly, the moneys being invested by the Company are, and will remain, government moneys. 3. That the income and capital gains are being derived from a non-commercial activity. | Detailed Reasoning - Portfolio interest: The question of whether an operation or activity is commercial in nature will depend on the facts of each particular case. As a guide, a portfolio holding in a company (i.e. a holding of X per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends (and ultimately and other income as explained above) received from such a holding would be exempt from tax (provided the other requirements of sovereign immunity are also satisfied). The ability for the Company to appoint a Representative to the Board of the Australian entity is subject to the Company itself having a diluted interest in the Australian entity of greater than 10%. At present, the Company has a less than 10% diluted equity interest in the Australian entity and therefore the Commissioner accepts that it has a non-commercial investment, that is, a portfolio holding (of less than 10%) in the Australian entity. | Detailed Reasoning - Effect of power to appoint a Representative to the Board of the Australian entity on the commerciality of the investment: However, it is the Commissioner's view that the holding of a portfolio interest alone is not determinative of whether an activity is passive or commercial in nature. As stated above, the holding of a passive investment would '…generally be accepted as non-commercial activity' (emphasis added). Accordingly, all the facts of each particular case are required to be considered in deciding whether an activity is passive or commercial. Importantly, this includes determining whether the foreign government agency has a sufficient level of influence (as opposed to control) over the company it has invested in, such that it can be said that it is involved in carrying on a commercial activity. In the present case, the Company has the ability to appoint a Representative should its diluted interests exceed X%. Such an appointment would give it an ability to exert at least some influence over the Board decisions affecting the carrying on of the Australian entity's business. Therefore the degree of such influence or the ability to exert influence would be an extremely important and relevant factor to be considered in determining the commerciality of an investment for sovereign immunity purposes. The Company in this case has control over its investment in the sense that it decides for itself whether or not it will invest (and maintain such investment) in the Australian entity. However, as it does not at present have a Representative on the Board of Directors (nor does it intend it to appoint such a Representative in the near future) it does not, at present, have real and actual power to control/affect the decisions influencing the business of the Australian entity. Accordingly, the conclusion above that Company's investment is passive based on its portfolio interest of less than 10% is not altered and the investment remains passive given that: · the Company's (diluted interest) investment in the Australian entity is now less than 10%; and · the Company is now unable, without actual representation on the Board of Directors of GPT to influence the business operations of the Australian entity. This is weighed against the fact that the Company is able to appoint a Representative in the future. Accordingly, in the event that the Company again appoints a Representative to the Board at some future time the nature of any power granted to such a Representative at that time will need to be examined closely to determine the extent of ultimate control and influence the Representative has over the business of the Australian entity. The nature of such power/s may well lead to the conclusion that the Company's investment is indeed commercial in nature at a future time. Accordingly, as all three conditions are satisfied the Commissioner considers the income and capital gains derived by the Company from its passive investment in Australia is exempt from income tax, including withholding tax, under the common law doctrine of sovereign immunity.