Private ruling: Sovereign immunity
Published: August 2013
Ruling period: 28 June 2013 to 28 June 2016
Date scheme commenced: 28 June 2013

Ruling: Q1: Is the Australian borrower required to withhold an amount of Australian withholding tax from interest under the loan paid to a foreign government bank under section 12-245, Schedule 1 Taxation Administration Act 1953 (Cth)? | A1: No

Relevant facts and circumstances: The Australian company has entered into a loan agreement with a foreign government bank to finance its business.

Relevant legislative provisions: Taxation Administration Act 1953 Schedule 1section 12-245, | Taxation Administration Act 1953 Schedule 1 subsection 15-15(2) | Taxation Administration Act 1953 Schedule 1 sections 355-45 | Taxation Administration Act 1953 Schedule 1 355-170 | Taxation Administration Act 1953 Schedule 1 355-270

Reasons for decision: Summary: The doctrine of sovereign immunity will mean that that in certain circumstances income derived by a foreign State from sources in another State should not be subject to tax in the State in which the income has its source. The requirements in ATO ID 2002/45 must be satisfied to establish that sovereign immunity applies to the particular income in question. In particular the following matters must be satisfied: · the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government; · the moneys being invested are and will remain government moneys; and · the income is being derived from a non-commercial activity. | Detailed Reasoning - Agency of a foreign government: For an entity to be considered for the doctrine of sovereign immunity, the entity making the investment into Australia must be a foreign government or agency of a foreign government. The bank is completely under the control and direction of the foreign state. The bank is therefore an agency of a foreign government. | Detailed Reasoning - Government moneys: For an entity to obtain an income tax exemption under the doctrine of sovereign immunity, the moneys being invested must be will remain government moneys. No individual possesses an entitlement or right to any of the capital or earnings of the bank as the bank does not have any private members. The bank is incapable of making specific payments to individuals and while the foreign government has an intended use for the accumulated capital and earnings of its investments all of its capital and earnings can only be paid or become payable to the foreign government. Legislation confirms that the bank is responsible for the management and control of the money in the bank Therefore all money including the not to be earned under the loan were and remain government moneys. | Detailed Reasoning - Non-commercial activity: For an entity's income to come under the doctrine of sovereign immunity, the income being derived must be from non-commercial activities. The bank will derive the interest from a passive long term loan. The loan related to its stated purpose of economic development and the loan will be used to create a long term asset for the Australian borrower. The bank will not in any way participate in the management of Australian companies and there is no equity interest in those companies Therefore the bank will derive the relevant income from non-commercial activities. | Detailed Reasoning - Conclusion: As the requirements of sovereign immunity are satisfied, the interest derived from its investment in the Australian company will not be subject to withholding tax in the hands of the foreign government bank and accordingly the Australian company does not have to withhold. | Detailed Reasoning - Disclaimer: You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf. The Register of private binding rulings is a public record of private rulings issued by the ATO. The register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies. The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.