Private ruling: Sovereign Immunity
Published: June 2012
Ruling period: 1 July 2011 - 30 June 2012 | 1 July 2012 - 30 June 2013 | 1 July 2013 - 30 June 2014 | 1 July 2014 - 30 June 2015

Ruling: Q1: Is the entity exempt from income tax on its interest income derived from investments in Australia in fixed income securities issued by government, central banks and government agencies, under the common law principles of sovereign immunity? | A1: Yes. The entity is exempt from income tax on its interest income derived from investments in Australia in fixed income securities issued by government, central banks and government agencies, under the common law principles of sovereign immunity.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The entity is a legal entity and the main bank of the foreign country. The status, purposes, functions and powers of the entity are stipulated by the Constitution of the foreign country and other laws. The relevant legislation specifies the functions of the entity in organising money circulation, monetary regulation, foreign economic activity and the regulation of the banks. The entity is responsible to and must report to the government. The government stipulates the laws which will regulate the activities of the foreign government entity. The entity's operations are not connected with the conduct of commercial activities. The opening of accounts in other foreign banks and operations on them are exercised by the entity within its management of the gold and foreign exchange reserves of the foreign country pursuing the objectives of providing protection and stability of the national currency. It is not connected with the conduct of commercial banking functions or other profit-oriented activities, including providing services to certain legal entities and individuals. The entity is the main bank of issue exercising operations in the open market in the course of management of gold and currency reserves of the foreign country; it is empowered to carry out all allowable transactions with currency, precious metals, securities and certain financial instruments. In addition to executing operations with the gold and foreign exchange reserves in accordance with stated objectives, the entity is also charged with the exclusive mandate to issue cash and organise its circulation in the foreign country, organise refinancing of credit institutions, establish rules for carrying out settlements and banking operations, prudential banking supervision, organise compilation of the balance of payments of the foreign country, and foreign exchange regulation and control. According to the relevant legislation, the entity is accountable to the relevant body of the foreign government, which appoints and dismisses the entity's Chairman and members of the entity's Board of Directors. The entity is investing in fixed income securities issued by: · government; · central banks; · government agencies and special purpose banks, and · supranationals. Supranationals include international financial organisations and banks founded by international agreements between governments. However, there are not currently any supranationals that the entity is planning on investing in Australia. The entity has stated that its activity on Australian market as well as on any other markets is solely for the performance of its functions as the main bank of the foreign country (as per the relevant legislation). The relevant legislation expressly excludes profit out of the list of purposes of the entity. The relevant legislation stipulates that the moneys being invested are and will remain government moneys. The entity has provided a list of fixed interest securities that is an example of the types of securities the entity is planning on investing in.


Reasons for decision: Summary: While the taxation legislation itself does not provide exemption specifically for foreign governments, the Australian government does recognise the international law doctrine of sovereign immunity and will provide exemption on investments of foreign governments and monetary authorities of foreign governments where the monies being invested are and will remain government monies (for example, investment of foreign reserve assets) and are invested in passive (that is, non-commercial) type investments. This is usually regarded as meaning investment at interest in traditional instruments such as bonds or a portfolio (that is, a holding of 10% or less of the equity in a company) holding of shares. Certain income derived from 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 are owned and controlled by the government and 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 which held that activities of a trading, commercial or other private law character were not governmental functions. When determining whether sovereign immunity applies to a particular operation or activity, it is necessary to establish whether the operation or activity is commercial in nature. 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. Accordingly, 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 summary, to establish that sovereign immunity applies to exempt 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 moneys being invested are and will remain government moneys; and · that the income is being derived from a non-commercial activity. | 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. The doctrine of sovereign immunity only applies to foreign government and agencies of the foreign government that engage in government functions. An activity undertaken by a foreign government agency will generally be accepted as the performance of governmental functions provided that it is functions of government and provided that the agency is owned and controlled by the government and does not engage in commercial activities. The entity is exercising governmental functions and is owned and controlled by the foreign government. As such, the entity will constitute an agency of a foreign government subject to satisfaction of the conditions discussed below. | Detailed Reasoning - Condition 2:: That the moneys being invested are and will remain government moneys. The entity has provided in its legislation that the moneys being invested are and will remain government moneys. | Detailed Reasoning - Condition 3:: That the income is being derived from a non-commercial activity. Commercial activities are not precisely defined and are dependent upon the facts and circumstances of each case. The entity's investments in Australia will consist solely of fixed income securities issued by government, central bank and government agencies. The entity's investments in Australia are considered to be of a passive and non-commercial nature. Based on the facts provided, the entity's investment in Australia is derived from non-commercial activities. Accordingly, an exemption under the principles of sovereign immunity for income tax on its interest income derived from Australia is available.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.