Private ruling: Sovereign immunity
Published: November 2012
Ruling period: 1 July 2012 to 30 June 2015
Date scheme commenced: 1 July 2012

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? | A1: Yes. The foreign country central bank is exempt from income tax on its interest and/or dividend income derived from Australia under the principle of sovereign immunity | Q2: Does the foreign country central bank qualify as a 'sovereign entity'? | A2: It is not necessary to answer this question. The foreign country's central bank's eligibility for an exemption from income taxes is not determined by establishing whether or not the central bank comes within the definition of a 'sovereign entity'. Rather, eligibility for an exemption will be determined by the application of the three conditions precedent examined in answer to Question 1.

Relevant facts and circumstances: The foreign government central bank is owned and controlled by the foreign government. Under the Constitution of the foreign country the foreign government central bank is responsible to, and must report to the government. The government stipulates the laws which will regulate the activities of the foreign government central bank. The foreign government central bank is the beneficial owner of the assets. These assets produce interest and dividend income in Australia.

Relevant legislative provisions: Taxation Administration Act 1953 Subsection 15-15(2)

Reasons for decision: Summary: Certain income derived 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 undertaking the activity are owned and controlled by the government, and those agencies 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 where it was held that activities of a trading, commercial or other private law character were not governmental functions. 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. 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 per cent 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 a particular case, 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 monies being invested are and will remain government monies, 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 or 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 government central bank is owned and controlled by the foreign government. Under the Constitution of the foreign country, the central bank is responsible to the government, and the government stipulates the laws which will regulate it. Condition 2 · that the monies being invested are and will remain government monies The foreign government central bank has provided evidence that it is, and will remain, the beneficial owner of the assets and the income derived from those assets. Condition 3 · that the income is being derived from a non-commercial activity. The foreign government central bank has provided evidence that it is not engaged in commercial activities in Australia, nor is it engaged in commercial activities anywhere else in the world. | Detailed Reasoning - Conclusion: The three conditions are satisfied. As a central bank owned and controlled by the foreign government, the foreign government central bank is exercising government functions. The foreign government central bank is, and will remain, the beneficial owner of the assets and the income produced from those assets. The foreign government central bank is not engaged in commercial activity. The interest and dividend income derived within Australia by the foreign government central bank is exempt from Australian tax under the international law doctrine of sovereign immunity.