Private ruling: Sovereign Immunity
Date of advice: 21 March 2018
Published: June 2018
Ruling period: XXXX to XXXX
Date scheme commenced: XXXX

Ruling: Q1: Is Entity B immune from Australian withholding tax under the common law doctrine of sovereign immunity on trust distributions received from its holding of units in Fund A? | A1: Yes.

Relevant facts and circumstances: 1. Entity A was established by a foreign government in accordance with a statute, to make and acquire investments for the benefit of the foreign government. 2. Entity B is a company incorporated by Entity A in the foreign government’s jurisdiction. 3. Entity B is wholly owned by Entity A, which in turn is wholly owned beneficially by the foreign government. 4. Entity B is wholly capitalised and funded by Entity A from funds allocated to Entity A by the foreign government. 5. Entity B is governed and managed by a manager elected by Entity A, being Entity B’s sole shareholder. 6. Income derived by Entity B will be distributed to Entity A and subsequently to the foreign government to be used by that foreign government. 7. Entity B has a unitholding of less than 10 per cent of the total units in Fund A, an Australian managed investment trust. 8. Neither the foreign government, nor its agencies, nor any entities owned (directly or indirectly) by the foreign government or its agencies hold any interest in Fund A, directly or indirectly, other than Entity B’s unitholding in Fund A. 9. The foreign government, Entity A and Entity B do not have the ability to exert any influence on the operations of Fund A. 10. The foreign government, Entity A and Entity B will not be represented on the board of directors of the trustee or responsible entity of Fund A.


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. To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and/or 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 being invested are and will remain government moneys; and 3. that the income is being derived from a non-commercial activity. If these three conditions are satisfied, the Australian sourced income or gains will not be subject to Australian income and withholding taxes (refer to ATO Interpretative Decision ID 2002/45 Withholding Tax - Sovereign Immunity ). | 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: An investment undertaken by a foreign government or agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. Entity A was established by a foreign government in accordance with a statute, to make and acquire investments for the benefit of the foreign government. Entity B is a company incorporated by Entity A in the foreign government’s jurisdiction. Entity B is wholly owned by Entity A, which in turn is wholly owned beneficially by the foreign government. The governance and management of Entity B is carried out by a manager elected by Entity A, an entity in which the foreign government holds 100 per cent of the beneficial interest. As the ultimate beneficial owner of Entity B, the foreign government is beneficially entitled to the income derived by Entity B. In view of the above, it is considered that Entity B satisfies the condition that the person who will be 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 being invested are and will remain government moneys: The moneys invested are and will remain the money of the foreign government for the following reasons: ● Entity B is wholly capitalised and funded by Entity A from funds allocated to Entity A by the foreign government; and ● the foreign government is the ultimate beneficial owner of Entity B. Therefore, as the moneys invested in the unitholding in Fund A by Entity B are and will remain government moneys, the second condition is satisfied. | Detailed Reasoning - Condition 3 – that the income is being derived from a non-commercial activity: Income derived by a foreign government or 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 of activity. However, in relation to a holding of shares in a company, or units in a unit trust as in the present case, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a commercial activity, including the carrying on of a business. Entity B’s investment in the unitholding in Fund A is considered to be a non-commercial activity for the following reasons: ● Entity B’s unitholding in Fund A constitutes a less than 10 per cent interest in Fund A; ● neither the foreign government, nor its agencies, nor any entities owned (directly or indirectly) by the foreign government or its age ncies holds any interest in Fund A, directly or indirectly, other than Entity B’s unitholding in Fund A; ● the foreign government, Entity A and Entity B will not be represented on the board of directors of the trustee or responsible entity of Fund A; and ● the foreign government, Entity A and Entity B do not have the ability to exert any influence on the operations of Fund A. Accordingly, Entity B’s investment in the unitholding in Fund A is a non-commercial activity. | Detailed Reasoning - Conclusion: As the three conditions for the common law doctrine of sovereign immunity to apply are satisfied, Entity B is immune from Australian withholding tax on trust distributions received from its holding of units in Fund A.