Private ruling: Sovereign Immunity
Date of advice: 8 February 2017
Published: July 2017
Ruling period: Years ended XXXX
Date scheme commenced: During the year ended XXXX.

Ruling: Q1: Will Entity A be immune from income and withholding taxes on: ● interest income derived from Australian debt instruments; ● dividend income derived from Australian shares; and ● other sundry income received as part of distributions received from Australian real estate and property unit trusts? under the common law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: 1. Entity A was established by a foreign government in accordance with a statute. 2. Entity A contributes to the sound development of the national economy and is responsible for investing the foreign government's foreign reserves. 3. Entity A is managed by a Board whose members are appointed by the foreign government. 4. Entity A is not in the business of money lending. 5. Entity A derives interest income from Australian debt instruments and dividend income from Australian shares, and receives distributions from Australian real estate and property unit trusts. 6. Each holding held by Entity A in each Australian company and each Australian unit trust is less than X% of the total shares/units on issue for each company/unit trust and thus, Entity A is not entitled to and has not appointed any director to the Board of Directors of any of the Australian companies or the trustee/Responsible Entity of the Australian unit trusts in which it holds shares or units. 7. The statute prohibits Entity A from participating, directly or indirectly, in profit-making activities or the ownership and management of any profit-making enterprise. 8. The retained earnings of Entity A are distributed to the foreign government.

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 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 - that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government: Entity A was established by a foreign government in accordance with a statute. Entity A is managed by a Board whose members are appointed by the foreign government. Entity A contributes to the sound development of the national economy and is responsible for investing the foreign government's foreign reserves. In view of the above, it is considered that Entity A meets the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government. | Detailed Reasoning - Condition 2 - that the moneys invested are and will remain government moneys: The retained earnings of Entity A are distributed to the foreign government. Accordingly, it is considered that the moneys invested by Entity A in Australian investments are and will remain the moneys of the foreign government. Therefore, this condition is satisfied. | Detailed Reasoning - Condition 3 - that the income or gain is being derived from a non-commercial activity: 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. However, in relation to the holding of shares in a company, or units in a unit trust, the extent of the relevant holding may give rise to questions as to whether it constitutes a commercial activity, which includes the carrying on of a business. In determining whether Entity A's investments in Australian debt instruments, Australian shares and units in Australian real estate and property unit trusts constitutes non-commercial activities, it is necessary to consider the extent of its holding and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of the entities. Each shareholding held by Entity A in each Australian company and each Australian unit trust is less than X% of the total shares/units on issue for each company/unit trust. Entity A is not entitled to and has not appointed any director to the Board of Directors of any of the Australian companies or the trustee/RE of the Australian unit trusts in which it holds shares or units. Entity A is not in the business of money lending. In view of the above, it is accepted that Entity A's investments in Australia constitutes non-commercial activities. | Detailed Reasoning - Conclusion: As discussed above, the three conditions for immunity under the common law doctrine of sovereign immunity in relation to Entity A's Australian investments are satisfied. Accordingly, pursuant to the common law doctrine of sovereign immunity, Entity A will be immune from income and withholding taxes on interest income derived from Australian debt instruments, dividend income derived from Australian shares and other sundry income received as part of distributions from Australian real estate and property unit trusts.