Private ruling: Sovereign Immunity
Date of advice: 20 December 2016
Published: May 2017
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
Date scheme commenced: During the income year ended 30 June 2017.

Ruling: Q1: Is the non-resident entity immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income or capital gains derived from its investment into trusts holding certain assets? | A1: Yes.

Relevant facts and circumstances: Non-resident entity 1. The non-resident entity (the 'non-resident subsidiary entity') is a wholly owned subsidiary of an agency of a foreign government created by statute (the 'non-resident parent entity'). 2. The non-resident subsidiary entity is exclusively funded by the non-resident parent entity. 3. The foreign government appoints the majority of the non-resident parent entity's board of directors. 4. The non-resident parent entity is accountable to the executive and legislative branches of the foreign government. It is required to lodge financial statements and other reports in respect of the funds it manages. It is also required to be audited by the foreign government. 5. The financial statements of the non-resident parent entity are included in the foreign government's annual financial report. 6. The non-resident parent entity manages and invests funds legally belonging to the foreign government. 7. Individuals have no legal or equitable remedies available to obtain monies from the non-resident parent entity. Investment 8. The non-resident subsidiary entity, as part of a consortium, has acquired an interest in trusts holding certain assets in Australia. 9. The non-resident subsidiary entity's investment into the trusts is for a significant period of time. 10. The non-resident subsidiary entity's investment into the trusts holding certain assets is on behalf of, and for the benefit of, the non-resident parent entity. 11. The investment will be made using a stapled group structure with an Asset Trust/Operating Trust staple (the Stapled Entities). 12. Under this structure, the non-resident subsidiary entity will hold an interest in the Stapled Entities and their respective trustee companies. 13. The non-resident subsidiary entity will invest in certain assets by acquiring a portfolio interest in the Stapled Entities. 14. The non-resident subsidiary entity will enter into the Securityholders' Agreement with the other consortium members to govern their respective dealings with each other and the Stapled Entities, as well as the governance arrangements applying to the running of the business. 15. The Securityholders' Agreement sets out the governance arrangements applying to each of the Securityholders in relation the Stapled Entities. 16. Clause 4.1. of the Securityholders' Agreement states that, subject to the Securityholders' Agreement and in so far as it can lawfully do so, all Securityholders (in both their capacity as a Securityholder and through any Director appointed by it) must exercise their powers in relation to the Stapled Entities to ensure that: (a) The Stapled Entities and each other subsidiary of the Stapled Entities carries on and conducts the business in a proper and efficient manner in accordance with sound business practice and for its respective own benefit and so as to give effect to the Business Plan; (b) The Stapled Entities and each other subsidiary of the Stapled Entities performs and complies with its obligations under the Securityholders' Agreement, each Transaction Agreement and the Constitution; (c) No Transaction Agreement Control Breach occurs; and (d) The Stapled Entities, each other subsidiary of the Stapled Entities, each Securityholder, each Beneficial Owner and their Affiliates comply with the conditions of any approval granted to it by the Foreign Investment Review Board (FIRB), including the FIRB conditions. 17. Securityholder Reserved Matters can only be actioned with the approval of a Special Majority of Securityholders as follows: (a) for a meeting, Securityholders that together hold voting rights in respect of more than XX% of the total Equity Interests present at the meeting and voting on the resolution in accordance with this Agreement; or (b) for a written resolution, Securityholders that together hold more than XX% of the total voting rights of all Securityholders entitled to vote on the resolution in accordance with this Agreement. 18. The non-resident subsidiary entity is proposing to hold sufficient voting power to veto the Securityholder Reserved Matters. 19. The Securityholder Reserved Matters, all of which are subject to a XX% Securityholder Resolution, are matters which go towards preserving and protecting the value of its investment 20. Clause 5.1 of the Securityholders' Agreement outlines a Securityholder's entitlement to appoint board Directors and stipulates that a Securityholder may appoint one Director per X.XX% interest. 21. The non-resident subsidiary entity will not exercise its right to appoint a board Director. 22. The non-resident subsidiary entity will also not transfer its Specified Proportion for the purposes of appointing Directors in accordance with clause 5.1(e) of the Securityholders' Agreement. 23. The non-resident subsidiary entity will also not enter into any Voting Pool Deed with other consortium members for the purposes of the assets. 24. Clause 6.5 of the Securityholders' Agreement outlines the rights of a Securityholder to appoint an observer to attend a meeting of the Board of Directors of an investee. Under clause 6.5(a)(2) of the Securityholders' Agreement, the non-resident subsidiary entity is entitled to appoint one observer per X.XX% interest held in the investment. 25. The non-resident subsidiary entity will appoint an observer to attend meetings of the Board of Directors under clause 6.5 of the Securityholders' Agreement. 26. As per the Securityholders' Agreement, the observer appointed by the non-resident subsidiary entity will not take part in the management of the investment; will have no ability to influence the decisions of the Board of Directors as the observer has no right to be consulted; and has no right to vote. 27. Prior to participating in any meeting of the Board or receiving any information as an Observer, the Observer appointed by the non-resident subsidiary entity must enter into a confidentiality deed with the Stapled Entities. Under the confidentiality deed, the Observer will agree to keep all information received as an Observer confidential; act in the capacity as an Observer in the best interests of the Stapled Entities; and observe any other reasonable requirements of the Stapled Entities. 28. An Observer appointed by the non-resident subsidiary entity will, however, be entitled to pass any information they receive in the capacity of Observer to the non-resident subsidiary entity.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B and | Income Tax Assessment Act 1997 section 4-1.

Reasons for decision: Detailed Reasoning - Detailed reasoning: 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 state or an agency of a foreign state: The non-resident subsidiary entity is part of an agency of a foreign state for the following reasons: ● Its non-resident parent entity was established by statute, and is funded by a foreign government ● It is exclusively funded by the non-resident parent entity ● The majority of the directors on the non-resident parent entity's board of directors are appointed by the foreign government ● The non-resident parent entity is evaluated and audited by the foreign government ● The non-resident parent entity's assets are all legally and beneficially owned by the foreign government, and ● The non-resident parent entity's purpose is to perform governmental functions. Given the above factors, the Commissioner accepts that the non-resident subsidiary entity and the non-resident parent entity satisfy this requirement. | 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. Are the contributions received by the non-resident parent entity government monies? The non-resident parent entity was established by a foreign government. It receives all of its funds for investment from the foreign government. The money is invested by the non-resident, and called upon by the foreign government when it needs to exercise governmental functions. The non-resident subsidiary entity is exclusively funded by the non-resident parent entity. 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. 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 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. In ATO Interpretative Decision ATO ID 2002/45 Sovereign Immunity, a holding of less than 10% is generally considered to be indicative of a passive investment. In all circumstances, consideration will be given to factors relating to the influence and control, particularly in relation to day to day management and key business, strategy and financial decisions that is exercised by the investor in relation to the acquired company or similar equity investment. Is non-resident subsidiary entity's proposed investment in the trusts holding certain assets a commercial transaction? In determining whether the income and gains derived by the non-resident subsidiary entity from its investment into the Stapled Entities are from a non-commercial activity, it is necessary to consider the nature of the non-resident subsidiary entity's investment including the extent of its holding and the degree of its actual or potential influence in respect of the business decisions of the Stapled Entities. Given that the non-resident subsidiary entity will hold portfolio interests in the Stapled Entities it: ● Is entitled to appoint one Director to the Board of Directors ● Is entitled to transfer its Specific Proportion for the purposes of appointing Directors to the Board of Directors ● Is entitled to appoint an observer to the Board of Directors, and ● Can veto XX% Securityholder Reserved Matters. However, the following matters are considered relevant: ● The non-resident subsidiary entity is not involved in the day-to-day management of the Stapled Entities ● The business of the Stapled Entities will be managed on a day-to-day basis by the CEO, CFO and senior management team. ● The appointment and removal of the CEO and CFO requires the approval of a Special Majority (XX%) of Directors ● The non-resident subsidiary entity has not and will not exercise its right to appoint a Board Director ● The non-resident subsidiary entity has not and will not exercise its right to transfer its Specific Proportion for the purposes of appointing Directors to the Board of Directors ● Although the non-resident subsidiary entity has power to veto XX% Securityholder Reserved Matters, these matters are significant matters which go towards preserving and protecting the value of its investment ● The non-resident subsidiary entity will appoint an observer to the Board of Directors. However, the observer will have no voting rights and no right to speak ● The non-resident subsidiary entity does not have sufficient voting power to pass any Securityholder actions or Securityholder Reserved matters on its own, and ● As the non-resident subsidiary entity has a portfolio interest in the Stapled Entities, it is not able to control ordinary Securityholder decisions which require approval of Securityholders holding more than 50% of the total Equity Interests in the Stapled Entities. In view of the above, it is accepted that the non-resident subsidiary entity's holding in the Stapled Entities is a non-commercial activity. | Detailed Reasoning - Conclusion: As the three conditions have been satisfied, the non-resident subsidiary entity will be immune from income taxes and withholding taxes on all income and gains derived from its investment into the trusts holding certain assets pursuant to the common law doctrine of sovereign immunity.