Private ruling: Sovereign immunity
Published: June 2013
Ruling period: Certain date during 2012 - certain date during 2016
Date scheme commenced: Certain date during 2012

Ruling: Q1: Will the income and capital gains derived in Australia by a non-resident company from its passive investment in Australia be exempt from income tax, including withholding tax, under the common law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: A non-resident company (the Company) was established by a foreign government to hold investments in Australia. The Company and its parent company are all wholly owned by a statutory body corporate established under an enactment of the foreign government to own and administer assets of that foreign government. The Company acquired an equity interest in an Australian entity listed on the Australian Securities Exchange. A related entity of the company appointed a representative (Representative) to the Board of the Australian entity. The Representative stepped down from the Board during 2012.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: While the taxation legislation itself does not provide an exemption specifically for foreign governments, the Australian government recognises the common law doctrine of sovereign immunity. Certain income derived from within Australia by foreign governments or agencies of foreign governments from the performance of government functions within Australia will be exempt from Australian tax under the common law doctrine of sovereign immunity. Activities undertaken by agencies of a foreign government will generally be accepted as the performance of governmental functions provided that the foreign government 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. In summary, and as stated in ATO Interpretative Decision ATO ID 2002/45 (ATO ID 2002/45) in relation to establishing that sovereign immunity applies to exempt certain income from withholding tax, it is necessary to establish the following to determine if sovereign immunity applies: · 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. Consideration will be given to how each of these requirements, in turn, applies in this case. 1. That the person making the investment (and therefore deriving the income and capital gains) is a foreign government or an agency of a foreign government. The Company, itself, is not a foreign government. Therefore, it will be necessary to consider whether it is an 'agency of a foreign government'. An 'agency of a foreign government' is not defined. However, subsection 995-1(1) of the Income Tax Assessment Act 1997 provides that a foreign government agency is: (a) the government of a foreign country or part of a foreign country; (b) the authority of the government of a foreign country; or (c) the authority of the government of part of a foreign country. In the context of sovereign immunity, we consider that an entity that is wholly owned by a foreign government is an 'authority' where that entity is performing a function for the public advantage and executes a function in the public interest and is not a private body established exclusively for private profit. The Company, which is indirectly and ultimately wholly owned by the foreign government, acts as a special purpose vehicle for the foreign government to make investments in Australia in the management of the foreign reserves. The management of the foreign reserves of a country is a function for the public advantage or public interest and is not a function exclusively for private profit. Therefore, the Company acts as an 'authority' of the government. Accordingly, the Company is considered to be an 'agency of a foreign government'. 2. That the moneys being invested are and will remain government moneys The funds used by the Company to invest in the Australian entity are sourced from the foreign reserves of the foreign government and will remain so for the period that the Company holds the investment. The money is being invested for the purpose of preserving and enhancing the foreign government's foreign reserves. All income derived from the Australian investment will be used to fund and support governmental functions of the foreign government. These reserves provide a stream of returns that can be spent or invested for the benefit of present and future generations of the foreign government, that is, for the public advantage and in the public interest, not for a private profit. Accordingly, the moneys being invested by the Company are, and will remain, government moneys. 3. That the income and capital gains are being derived from a non-commercial activity. The question of whether an operation or activity is commercial in nature will depend on the facts of each particular case. As a guide, a portfolio holding in a company (i.e. a holding of 10 per cent or less of the equity in a company) will generally be accepted as non-commercial activity and any dividends received from such a holding would be exempt from tax (provided the other requirements of sovereign immunity are also satisfied). The Company has a direct equity investment in the Australian entity that is substantially less than 10%. However, it is the Commissioner's view that the holding of a portfolio interest alone is not determinative of whether an activity is passive or commercial nature. As stated above, the holding of a passive investment would '… generally be accepted as non-commercial activity' (emphasis added). Accordingly, all the facts of each particular case are required to be considered in deciding whether an activity is passive or commercial. Importantly, this includes determining whether the government or its foreign government agency has a sufficient level of influence and control over the company it has invested in, such that it can be said that it is involved in carrying on a commercial activity. The Company does not have the power to appoint a director, unlike a related entity, to the Board of the Australian entity - hence it does not have the ability to influence or control the business operations of the Australian entity. Accordingly the Commissioner accepts that the investment in the Australian entity, being less than 10%, is a passive, non-commercial investment. Accordingly, as all three conditions are satisfied the Commissioner considers the income and capital gains derived by the Company from its passive investment in Australia is exempt from income tax, including withholding tax, under the common law doctrine of sovereign immunity.