Private ruling: Sovereign Immunity
Published: April 2013

Ruling: What this Ruling is about: | Are the entity and its wholly owned offshore subsidiary exempt from Australian income tax (including capital gains tax) and withholding tax on its interest income, dividend income, trust distributions and any other income derived from the minority investment in the special purpose vehicles used to acquire Australian assets under the principle of sovereign immunity.

Relevant facts and circumstances: The entity is a public institution that was established by the overseas government as an independent government institution. The entity is wholly owned by the overseas government and is subject to its supervision. The entity carries out its investment program independently and without reference to the overseas government. The overseas government provides funds to the entity on a periodic basis and the entity is required to make available to the overseas government financial resources to secure and maintain the future welfare of the country. The principle activities and purpose of the entity are listed within its legislation. The entity has acquired a minority interest through its wholly owned offshore subsidiary in the special purpose vehicles to be used to acquire Australian assets. The entity will not have Board representation in the special purpose vehicles. Explanation: Certain income derived from within Australia by foreign governments from the performance of governmental functions within Australia will be exempt from Australian tax under the doctrine of sovereign immunity. 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. Per ATO ID 2002/45, to establish whether sovereign immunity applies to exempt dividend, interest, and royalty income from 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. Condition 1 - that the person making the investment (and therefore deriving the income) is a foreign government or agency of a foreign government The entity has provided evidence which demonstrates that it 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 below. Condition 2 - that the moneys being invested are and will remain government moneys The entity has provided evidence that the moneys being invested are and will remain government money. The entity is required to make available to the overseas government, as needed, the financial resources to secure and maintain the future welfare of the country. Condition 3 - that the income is being derived from a non-commercial activity Based on the evidence provided by the entity, it is considered that the income is being derived from a non commercial activity. Conclusion Accordingly, having satisfied conditions one to three above, the entity and its wholly owned subsidiary will qualify for an exemption from Australian income tax (including capital gains tax) and withholding tax on its interest income, dividend income, trust distributions and any other income derived from the proposed minority investment in the special purpose vehicles proposed to be used to acquire Australian assets under the principle of sovereign immunity