Private ruling: Sovereign immunity
Published: April 2013
Ruling period: 1 July 2012 to 30 June 2018 | Commencement date of scheme: | 1 July 2012 | The scheme that is the subject of the ruling: | The essential characteristics of its functions and responsibilities are described below briefly: | · note and coin issue | · regulation of the quantity of money in circulation and control of credit | · regulation of the financial system and capital market | · responsibility for safeguarding the stability of the financial system | · the bank's fiscal agent functions | · responsibilities in international affairs | · faculties with respect to international exchange transactions | · statistical functions. | The foreign country central bank has provided the following documents in support of its application for a private binding ruling: | · the legislation constituting its powers and functions | · certificate of residency and tax exemption from the foreign country taxing authorities | · completed ATO questionnaire | · completed and signed application for private binding ruling | · 2010 and 2011 Annual Reports | Relevant provisions: | Taxation Administration Act 1953 Schedule 1 subsection 15-15(2). | Explanation: (This does not form part of the notice of private ruling) | Sovereign immunity | While the taxation legislation itself does not provide exemption specifically for foreign governments, the international law doctrine of sovereign immunity is recognised as providing an exemption on investments of foreign governments and monetary authorities of foreign governments where the monies being invested are and will remain government monies (for example, investment of foreign reserve assets), and are invested in passive (that is, non-commercial) type investments. This is usually regarded as meaning investments at interest in traditional instruments such as bonds or a portfolio (that is, a holding of 10% or less of the equity in a company) holding of shares. | Certain income derived from within Australia by foreign governments is exempt from Australian tax under the international law doctrine of sovereign immunity. In accordance with that doctrine, Australia accepts that any income derived by a foreign government from the performance of governmental functions within Australia is exempt from Australian tax. An activity undertaken by a foreign government will generally be accepted as the performance of governmental functions provided that the 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. | When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature. Whether an operation or activity is commercial in nature will depend on the facts of each particular case. However, as a guide, a commercial activity is generally an activity concerned with the trading of goods and services, such as buying, selling, bartering and transportation, and includes the carrying on of a business. | Income derived by a foreign government or by any other body exercising governmental functions from interest bearing investments or investments in equities is generally not considered to be income derived from a commercial operation or activity. Accordingly, provided the funds used to make such investments are and remain government moneys, the income is accepted as being exempt from tax under the common law doctrine of sovereign immunity. | In relation to a holding of shares in a company, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or the carrying on of a business, but this would depend on the particular circumstances. A portfolio holding in a company (that is, a holding of 10% or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax. | In summary, to establish that sovereign immunity applies to exempt dividend and interest income from withholding tax, it is necessary to establish the following: | · 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. | If these three conditions are satisfied, then the dividend and interest income will not be subject to Australian income taxes which include withholding taxes." | Condition 1 | That the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government | The foreign country central bank has provided in its annual reports that it is a government controlled central bank and that it is the beneficial owner of the assets and therefore it is beneficially entitled to the income. | Condition 2 | That the moneys being invested are and will remain government moneys | The foreign country central bank has provided evidence in its Annual Reports that the moneys being invested remain government moneys. | Condition 3 | That the income is being derived from a non-commercial activity | In accordance with the facts provided the foreign country central bank's investments in Australia are considered to be of a passive and non-commercial nature. | Accordingly, an exemption under the principles of sovereign immunity for interest and dividend withholding tax is available

Ruling: Q1: Is the foreign country central bank exempt from income tax on its interest and/or dividend income derived from Australia under the principle of sovereign immunity? Yes. The foreign country central bank is considered to be exercising governmental functions and fulfils the required conditions for the common law principles of sovereign immunity to apply to exempt it from taxation on its dividend and interest income derived in Australia.