Private ruling: Sovereign Immunity
Date of advice: 9 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022 | Year ended 30 June 2023 | Year ended 30 June 2024 | Year ended 30 June 2025 | Year ended 30 June 2026
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the non-resident entity exempt from liability to income tax and withholding tax on interest income derived from its investment in up to 10% of the units in a managed investment scheme (MIS) under a double tax agreement? | A1: Yes. | Q2: Will the non-resident entity be immune from income tax and withholding tax on any ordinary income or statutory income derived from its investment in up to 10% of the units in the MIS under the common law doctrine of sovereign immunity? | A2: Yes.

Relevant facts and circumstances: Non-resident entity 1. The non-resident entity was established and capitalised by a foreign government. 2. The non-resident entity is in a country that has a double tax agreement (DTA) with Australia. 3. Any contracts or agreements entered into by the non-resident entity are binding on the foreign government. 4. The non-resident entity's purpose is to invest funds for the purpose of funding a government scheme. 5. The non-resident entity's board is appointed by the foreign government. 6. The non-resident entity receives its funds from the foreign government. 7. The non-resident entity's investments, assets, and all income and gains derived from them are beneficially owned by the government. The MIS 8. The MIS is an Australian resident investment entity structured as a conventional stapled unit trust. 9. The Responsible Entity of MIS employs a manager to operate the day to day business of the MIS and to manage the assets of the MIS on its behalf. 10. The MIS Advisory Board will have a minimum of 3 members, and a maximum of 5 members. An investor is eligible if they invest over a specified amount into the fund. If there are still unfilled Advisory Board seats, then these will be offered to the members with the highest amount of capital invested at close. Related body corporates are allowed to aggregate their interests for the purposes of gaining an Advisory Board seat. 11. Where there are more than 5 members who fulfil the criteria above, the five members who were first registered to participate in the fund will be the Advisory Board members. 12. Advisory Board meetings are held annually. Additional meetings may also be called by the Responsible Entity or the majority of members on the Advisory Board. 13. The Advisory Board shall provide advice and counsel to the Responsible Entity and the manager in accordance with the governing document of the trust, which advice and counsel the Responsible Entity and Manager may have regard to and consider in their respective roles in relation to the management of the MIS. The Advisory Board shall take no part in the control or management of the MIS, nor shall it have any power or authority to act for or on behalf of the scheme. All investment decisions, as well as all responsibility for the management of the MIS, shall rest with the Responsible Entity. 14. The Advisory Board must approve any of the following decisions made by the Responsible Entity: a. The issuing of units in the MIS which would push the amount of capital raised beyond the listed amount b. Changing the final closing date for the initial capital raising c. The entering into of transactions involving a related party of the Manager or Responsible Entity which leads to a potential or actual conflict of interest that involving amounts above a specified amount d. The use of independent experts other than those prescribed in the governing document of the MIS e. The sale of scheme assets directly to an associate of the manager or Responsible Entity f. The entering into of any investment, where the value of the investment is greater than 35% of the capital raised, and g. Any other matters put to it by the Responsible Entity or Manager from time to time. 15. The MIS may also put matters to its members. There are four types of matters; 50% Members Resolutions, 60% Member Resolutions, 80% Members Resolutions, and unanimous Members Resolutions, where the respective percentage of Members by unitholding must vote in favour of the Resolution for it to pass. 16. 50% Members Resolutions include; a. Where the scheme is unregistered, the removal of the Responsible Entity where there has been negligent conduct by the Responsible Entity, a breach of the Constitution by the Responsible Entity, or the Responsible Entity is insolvent. b. Where the scheme is unregistered and the Responsible Entity has been removed, the appointment of a new Responsible Entity. 17. 60% Members Resolutions include a. Any extension to the 10 year term of the Fund. 18. 80% Member Resolutions include a. The consolidation or division of the number of units on issue b. With the exception of Units allotted and issued pursuant to the Initial Close and the Final Close, the allotting and issuing by the Responsible Entity of any new Units in any Class, the creating of any new Class of Units, or the varying of the rights, restrictions or obligations attaching to a particular Unit or Class c. The allotting and issuing by the Responsible Entity of any Financial Product d. While the scheme is unregistered, the amending of any terms in the governing document of the MIS e. Materially amending any terms in the Management Agreement f. The unstapling of any or all units in the scheme g. To terminate and wind up the Trust h. The postponing of the realisation of any scheme assets on termination of the Trust, provided it is done in the best interests of the Members and i. The removal and replacement of the Responsible Entity 19. Unanimous Member Resolutions include a. The making of amendments to specific governing document clauses b. Distributions of capital made by means of property or the issue of additional units, and c. In specie distributions of any scheme assets to a Member. The non-resident entity's proposed investment in the MIS 20. The non-resident entity proposes to invest in the MIS. The non-resident entity is proposing to invest in up to 10% of the units in the MIS. 21. As part of this investment, the non-resident entity will be entitled to an Advisory Board seat as they are investing over the specified amount. The non-resident entity proposes to exercise this right to appoint an Advisory Board member. 22. The non-resident entity will derive distributions from the MIS and capital gains on sale of the units. 23. A separate entity with some links to the non-resident entity also proposes to acquire up to 10% of the units issued by the MIS. 24. As part of this investment, the separate entity will also be entitled to an Advisory Board seat and proposes to exercise the right to appoint an Advisory Board member.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1 | Income Tax Assessment Act 1997 section 995-1 | International Tax Agreements Act 1953 section 3AAA | International Tax Agreements Act 1953 section 4 Double Tax Agreement

Reasons for decision: Summary: The non-resident entity is exempt from liability to withholding and income taxes on interest income derived from its investment in the MIS. | Detailed Reasoning - Detailed Reasoning: Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or withholding tax under section 128B of the ITAA 1936 on Australian-sourced income, unless an exemption or exclusion applies. In determining liability to tax on Australian income derived by a foreign resident, it is necessary to also consider the 'Swedish Agreement' as defined in section 3AAA of the International Tax Agreements Act 1953 (the Agreements Act). Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those Acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act, provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). | Detailed Reasoning - Tax agreement: There is a double tax agreement between Australia and the country in which the non-resident entity resides. The agreement provides that interest income derived by a government of a contracting state be exempt from tax in the other contracting state. The non-resident entity derives interest income as part of its interest in the MIS. | Detailed Reasoning - Is the non-resident entity a part of the government of a contracting state?: The non-resident entity is a part of the government of a foreign state as: • it was established by, is funded by, and is part of the foreign government with whom Australia has a tax agreement • any contracts or agreements the non-resident entity enters are binding on the state • its board of directors, chairman, and deputy chairman are all appointed by the foreign government • it is evaluated and audited by the foreign government and the auditors it appoints, and • its assets are all beneficially owned by the foreign government. As the non-resident entity satisfies this condition, it is exempt from liability to withholding and income taxes on interest income derived from its investment in the MIS. | Summary: The non-resident entity is immune from income tax and withholding tax on any ordinary income or statutory income derived from its investment in the MIS under the common law doctrine of sovereign immunity. | Detailed Reasoning - Sovereign Immunity: 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. In determining whether the doctrine of sovereign immunity applies to 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: a foreign state or separate entity of a foreign state: Is the non-resident entity a foreign state or a separate entity of a foreign state? For the reasons outlined in the answer to question 1 above, the non-resident entity is a part of a foreign government satisfying this requirement. | Detailed Reasoning - Condition 2: The monies invested 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 in the scheme are and will remain government monies. Are the contributions received by the non-resident entity government monies? The non-resident entity was established by, and received its initial capital from, a foreign government. It receives all of its funds for investment from the foreign government. The money is invested by the non-resident entity, and called upon by the foreign government when it needs to exercise governmental functions, including funding the government scheme. Accordingly, the money the subject of this scheme is and will remain government monies, satisfying this requirement with respect to sovereign immunity. | Detailed Reasoning - Condition 3: Non-commercial transaction: 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. In relation to the ownership of shares in a company or other similar equity interests, there would 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. A determination of commerciality will depend on the particular circumstances. Importantly, consideration will be given to factors relating to the influence and control that is exercised by the investor in relation to the acquired company or similar equity investment, particularly in relation to its influence on day to day management and key business, strategy and financial decisions. Is the non-resident entity's proposed investment in the MIS a commercial transaction? The non-resident entity proposes to hold up to 10% of the units in the MIS. The factors relevant to determining whether this investment by the non-resident entity is reflective of a commercial transaction are as follows; • The non-resident entity has no influence on the day to day management of the MIS. • The non-resident entity holds up to 10% of the units, and by extension, 10% of the voting rights in the MIS. Member resolutions relate primarily to issues of governance and investor protection rather than business management. These issues include termination of the MIS, replacing the Responsible Entity, the issuing of new units, varying of rights associated with unitholding, and the amending of the governing documents. • The non-resident entity will have a representative on the MIS Advisory Board. The Advisory Board provides advice, counsel and approval to the Manager and Responsible Entity on the matters described. These matters include the entering into of significant related party transactions, the use of independent experts that are not in the governing documents, and the issuing of new units or change in final closing date for the initial capital raising. The powers of the Advisory Board are quite restrictive and are primarily checks and balances on the Responsible Entity and the Manager. They are consistent with investment protection rather than taking a role in the management of the business. • Based on the facts and circumstances of this case, the separate entity's investment into the MIS does not further taint the non-resident entity's investment for the purposes of sovereign immunity. • Based on the facts and circumstances of this case, the separate entity's appointment of an Advisory Board member also does not taint the non-resident entity's investment for the purposes of sovereign immunity. Together, the above factors indicate that the non-resident entity's investment into the MIS is a passive holding, and therefore non-commercial transaction, satisfying this condition. | Detailed Reasoning - Conclusion: As the three conditions have been satisfied, the non-resident entity is immune from income tax and withholding tax on income derived from its investment into the MIS under the common law doctrine of sovereign immunity.