Private ruling: Doctrine of sovereign immunity
Date of advice: 26 May 2017
Published: September 2017
Ruling period: 1 July 2016 to 30 June 2021
Date scheme commenced: 1 January 2017

Ruling: Q1: Is the agent immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its direct investment in less than 0.3% of the fund? | A1: Yes.

Relevant facts and circumstances: The entity and the agent 1. The entity was established by the enactment of legislation of a foreign nation. 2. The entity is one of the departments of the Government of a foreign nation and is not a separate entity from the Government. 3. The entity's objectives are to propose and outline the public financial policy for the Government and to make plans related to financial affairs which guarantee the achievement of the objectives of the Government's social and economic development plans. 4. Among other roles, the entity is empowered to manage Government investments. 5. The entity receives the revenues and funds of the Government and disperses these funds to other departments of the Government as well as investing surplus funds for the benefit of the Government. 6. The entity established a wholly owned limited liability corporation in its jurisdiction to act as agent to facilitate and exercise the governmental functions and manage assets entrusted by the Government. 7. The entity holds 100% of the beneficial interest in the agent as well as being the ultimate parent entity of the agent. 8. The agent has been wholly capitalised and funded by the entity. The funds used for capitalisation and ongoing financing are from the general pool of Government finances which are managed by the entity. The fund 9. The entity has identified an Australian investment, in which it is proposing to acquire an interest. 10. The investment is an unlisted, wholesale, open ended, pooled fund which provides investors with exposure to high quality investments located in Australia. 11. The agent will subscribe for units in the fund which presently represent less than a 0.3% interest in the fund. 12. The agent expects to receive trust distributions from the fund generated from the rental income received from the tenants of the fund's investment properties. 13. Neither the entity nor the agent is able to exert any actual or potential influence on the management or operations of the fund.

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 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 monies invested are and will remain government monies, 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: Foreign government or an agency of a foreign government: The facts are that: ● the entity was established by the Government of a foreign nation to perform governmental functions, ● is not a separate entity from the Government, and ● the agent is 100% beneficially owned by the entity, created to facilitate and exercise the governmental functions bestowed on the entity. Accordingly, it is accepted that the agent (and the entity) is a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 2: Monies 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 agent was incorporated to make and acquire investments for the benefit of the entity. The agent has been wholly capitalised and funded by the entity. The funds used for capitalisation and ongoing financing are from the general pool of Government finances which are managed by the entity. The entity receives the revenues and funds of the Government and disperses these funds to other departments of the Government as well as investing surplus funds. Accordingly, the monies that are invested by the agent for the benefit of the entity are, and will remain, government monies. | Detailed Reasoning - Condition 3: Non-commercial transaction: As noted in 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. 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 agent will subscribe for units in a fund which presently represent less than a 0.3% interest in the unlisted, wholesale, open ended, pooled fund. Neither the agent nor the entity will exert any actual or potential influence on the management or operations of the fund. Accordingly, the direct investment by the agent into the fund will constitute a passive investment and therefore a non-commercial activity. | Detailed Reasoning - Conclusion: The agent is immune from income tax and withholding tax on all income and gains derived from the investment into the fund detailed above pursuant to the common law doctrine of sovereign immunity.