Private ruling: Sovereign Immunity
Date of advice: 19 December 2017
Published: May 2018
Ruling period: 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021
Date scheme commenced: 14 June 2017

Ruling: Q1: Will the entity be immune from liability to income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its ownership or subsequent disposal of its less than 2% equity and debt interests in the Australian Trusts? | A1: Yes.

Relevant facts and circumstances: 1. The entity is a corporation established in a foreign State to advance the objectives of the Government of the State. 2. The entity is a corporation without share capital and although it is not expressly an agent of the State, it is considered to be owned by the State and as a result is exempt from income tax in the foreign State. 3. No parties other than the State have any rights to acquire the capital of the entity. 4. The entity operates such that its only sources of revenue are premiums and investment returns. The only use of such funds is to meet the objectives of the State. 5. On a winding up or dissolution of the entity, the assets of the entity would be dealt with pursuant to the specific legislation enacted by the State at the time, thereby making the dealing with such assets under the control of the State. If no specific legislation was enacted to effect the dissolution or winding up of the entity, the assets of the entity would be distributed to the State. 6. The entity engages the Investment Manager to provide investment management services. 7. The Investment Manager makes investments and loans for a number of State-controlled entities. 8. The entity holds a less than 2% interest in the Australian Trusts. 9. The entity also directly holds less than 2% of the debt interests respectively issued by Australian Trusts. 10. The Australian Trusts are the head of an ownership structure that holds Australian property and business interests. 11. The entity has the right to cast a proportionate number of votes with respect to its interest on owner resolutions in respect of matters for the Australian Trusts and their Trustee Companies. 12. A deed sets out the voting thresholds for resolutions to be: (i) Reserved Matters Resolutions which require approval by 50% of the holders present (voting equivalent with their holdings) provided that such a resolution is not opposed by security holders with an aggregate holding equal to or greater than a prescribed amount. (ii) Special Reserved Matters Resolutions which require approval by 50% of the holders present (voting equivalent with their holdings) provided that such a resolution is not opposed by one or more holder that has greater than a prescribed holding amount. 13. The Reserved Matters are set out in the deed. 14. The Special Reserved Matters are set out in the deed. 15. The entity will not enter into any agreement or arrangement which requires it to vote consistently with any other holder. 16. The entity will not be a member of a pooled ownership group and will have no rights to appoint a director and no director will be eligible to cast votes in respect of the entity’s interests.

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 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 government or an agency of a foreign government: The entity is a corporation established in the State to advance the objectives of the government of the State. The entity was formed without share capital and although it is not expressly an agent of the State, it is considered to be owned by the State and as a result is exempt from income tax. As such, the Commissioner accepts that the entity is an agency of the State, which is considered to be a foreign government. | 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. The capital of the entity is considered to be owned by the State. On a winding up or dissolution of the entity, the assets would be dealt with either by specific legislation enacted by the State, thus demonstrating the State’s control over the assets. The scheme and operation of the entity is such that the only sources of revenue are premiums and investment returns. The only use of such funds is to meet the objectives of the State. Accordingly, it is accepted that the monies invested by the entity for the benefit of the State are, and will remain, government monies. | Detailed Reasoning - Condition 3: Non-commercial transaction: As noted in ATO ID 2002/45 Withholding Tax - Sovereign Immunity , 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. On the other hand, 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. In relation to the ownership of shares in a company or other similar equity interests, there will 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. In all circumstances, consideration will be given to factors relating to the influence or control potentially able to be exercised by the investor (or a related party/associate of the investor) in relation to the entity invested in. This includes (but is not limited to) any potential influence or control in relation to day to day management and key business, strategy and financial decisions. The entity holds a less than 2% interest in the Australian Trusts. The entity also directly holds less than 2% of the debt interests respectively issued by Australian Trusts. The Australian Trusts are the head of an ownership structure that holds Australian property and business interests. The entity has the right to cast votes with respect to its interest on resolutions in respect of certain limited matters for the Australian Trusts and their Trustee Companies. Resolutions can only be approved by holders who together hold more than 50% of the total number of securities held by holders eligible to vote on the resolution. The entity’s voting power is such as it cannot affect the outcome of a vote to approve a resolution. Further, the entity will not enter into any agreement or arrangement which requires it to vote consistently with any other holder. The entity does not hold sufficient interests in its own right to appoint a director to the Boards. Furthermore, the entity will not aggregate its interest to form a pool or group for the purpose of appointing a director. Consequently, the entity will not be a member of a pooled group and, as such, no director will be eligible to cast votes in respect of the entity’s interest. Having regard to the above, the Commissioner accepts that the interest held by the entity in the equity and debt of the Australian Trusts will constitute a passive investment and therefore a non-commercial activity.