Private ruling: Sovereign Immunity
Date of advice: 4 October 2017
Published: February 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Non-Resident D immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from: a) its current investments in Australia listed at paragraph 16 of the relevant facts and circumstances of the Ruling, and b) its future investments in Australia when made within the parameters contained in paragraph 19 of the relevant facts and circumstances of the Ruling. | A1: Yes

Relevant facts and circumstances: Non-Resident A 1. Non-Resident A is a public institution owned, established and supervised by a foreign government. 2. Non-Resident A’s primary objective is to invest funds and deliver sustained long-term financial returns for the foreign government. Non-Resident A receives its funds from the foreign government. 3. Non-Resident A’s Board of Directors comprises a chairman and board members who are appointed by the foreign government. 4. Any monies given to Non-Resident A or income made by Non-Resident A is ultimately owned by the foreign government. The foreign government is able to recall any monies of Non-Resident A or its subsidiaries at any time. If Non-Resident A is liquidated or dissolved, all monies will flow back to the foreign government. Non-Resident B and Non-Resident C 5. Non-Resident B is a wholly owned subsidiary company of Non-Resident A. It is not a resident of Australia, nor does it have a permanent establishment in Australia. 6. Non-Resident C is a wholly owned subsidiary company of Non-Resident B. It is not a resident of Australia, nor does it have a permanent establishment in Australia. 7. Non-Resident A has the right to form subsidiaries to achieve its objectives. 8. Non-Resident A does not direct the day-to-day management of Non-Resident B or Non-Resident C. The directors that Non-Resident A appoints to the boards of Non-Resident B and Non-Resident C have the responsibility, in their capacities as directors, of ensuring Non-Resident B and Non-Resident C conduct their activities in a manner consistent with the guiding purposes of Non-Resident A. Non-Resident D 9. Non-Resident D is a foreign partnership and is not a resident company of Australia as defined in section 6 of the Income Tax Assessment Act 1936 (ITAA 1936). 10. Non-Resident A is the majority partner of Non-Resident D and Non-Resident C is the minority partner. 11. Non-Resident C acts as the general partner of Non-Resident D. Non-Resident D and Non-Resident C are both 100% funded by Non-Resident A. Non-Resident A is funded by the foreign government. Non-Resident A has oversight on matters relating to the investment policies and strategies of Non-Resident D as implemented by Non-Resident C, as general partner of Non-Resident D. 12. Non-Resident D is treated as a company for Australian income tax purposes pursuant to section 94J of the ITAA 1936. Where Non-Resident D is in receipt of Australian sourced income, the final Australian tax liability rests with Non-Resident D. 13. Non-Resident D is wholly funded directly and indirectly with equity by Non-Resident A. 14. Non-Resident A and Non-Resident C, as the partners of Non-Resident D, each have the right to the capital of the partnership in proportion to their interest. Investments currently held by Non-Resident D 15. Non-Resident D invests in listed securities and funds. 16. Currently, Non-Resident D holds less than 1% of the equity securities issued in a number of Australian entities: 17. The Australian investments currently held by Non-Resident D all exhibit the following characteristics: a) The securities are listed on the Australian Securities Exchange (‘ASX’) or another recognised stock exchange, b) Non-Resident D, along with any related parties, has a combined holding of less than 10% of the equity securities of the issuer, c) Neither Non-Resident D, nor any related party, has any involvement in the day to day management of the issuing entity’s business. d) Neither Non-Resident D, nor a related party, has any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of any unit trust in which Non-Resident D may have acquired units, e) Neither Non-Resident D, nor a related party, has any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and f) Non-Resident D, along with any related party, only has rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. Future investments of Non-Resident D 18. In the future, Non-Resident D will assemble and have the general partner, Non-Resident C, manage an investment portfolio consisting of Australian listed securities and funds including managed investment trusts. 19. Future investments made by Non-Resident D in Australian equity securities will conform with the following parameters: a) All securities will be listed on the ASX or another recognised stock exchange, b) Non-Resident D, along with any related party, will have a combined holding of less than 10% of the equity securities of the issuer, c) Neither Non-Resident D, nor any related party, will have any involvement in the day to day management of the issuing entity’s business, d) Neither Non-Resident D, nor a related party, will have any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which Non-Resident D may acquire units, e) Neither Non-Resident D, nor a related party, will have any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and f) Non-Resident D, along with any related party, will only have rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. 20. Non-Resident D is and will be in receipt of the following types of Australian sourced income: a) Rental income, b) Interest income, c) Dividend income, d) Other fund payments from MITs, e) Other trust distributions, and f) Gains arising on disposal of the listed securities. 21. Non-Resident D is not in the business of trading in equity and debt securities. Non-Resident D holds a portfolio of stocks as an index in order to gain exposure to the listed markets.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Detailed reasoning: Sovereign immunity background 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. In 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 under the doctrine of sovereign immunity. Condition 1: That the person making the investment and deriving the income is a foreign government or agency of a foreign government In order to establish that Non-Resident D is an agency of a foreign government, its partners need to be wholly owned by a foreign government or by an agency of a foreign government. The partners are Non-Resident A and Non-Resident C, which is a subsidiary of Non-Resident B. Is Non-Resident A an agency of a foreign government? Non-Resident A is a public institution established by the foreign government as an independent government institution. The country of the foreign government is a foreign state in accordance with subsection 995-1 of ITAA 1997. Its authority is derived from its constituent Act. Non-Resident A satisfies the definition of a foreign government agency under subsection 995-1 of ITAA 1997, being an authority of the government of a foreign state. Non-Resident A is wholly owned by the foreign government and is subject to its supervision. Non-Resident A itself does not undertake any other activities besides investing the financial surplus resources of the foreign government. Non-Resident A exercises the authority to invest government money which, together with any returns, will ultimately be for the benefit of the foreign government. Although Non-Resident A is independent and has considerable operational autonomy, it is still ultimately accountable to the foreign government. Its purpose is to execute a function in the public interest, which is to invest funds to make available the necessary financial resources to secure and maintain the future welfare of the foreign country. The management of the foreign reserves of a country is a function for the public interest and is not a function exclusively for private profit. The foreign government may withdraw funds from Non-Resident A at any time in order to meet governmental functions. Based on the above factors, Non-Resident A is considered an agency of a foreign government. Is Non-Resident C an agency of a foreign government? Non-Resident A has the right to form subsidiaries to achieve its objectives. Non-Resident B is a wholly-owned subsidiary company of Non-Resident A. Non-Resident C is a wholly-owned subsidiary company of Non-Resident B. While Non-Resident A does not direct the day-to-day management of Non-Resident B and Non-Resident C, the directors that Non-Resident A appoints to the boards of Non-Resident B and Non-Resident C have the responsibility, acting in their capacities as directors of the companies, to ensure that Non-Resident B and Non-Resident C conduct their activities in a manner consistent with the guiding purposes of Non-Resident A, as determined above. As both Non-Resident B and Non-Resident C are indirectly guided by Non-Resident A, conduct activities consistent with Non-Resident A’s objectives, and are wholly owned by Non-Resident A, they are also considered to be agencies of a foreign government. Is Non-Resident D an agency of a foreign government? The two partners of Non-Resident D are Non-Resident A and Non-Resident C. The factors and ownership structure considered above demonstrate that Non-Resident A, Non-Resident B and Non-Resident C are all ultimately owned and controlled by the foreign government. Both partners are considered agencies of a foreign government. Consequently, Non-Resident D will constitute an 'agency of a foreign government' as its two partners, Non-Resident A and Non-Resident C, independently satisfy the requirement of being an agency of a foreign government for the purposes of sovereign immunity. 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. Non-Resident D must therefore establish that the monies it invests are and will remain government monies. Non-Resident D receives its funds from its partners, being Non-Resident A and Non-Resident C. Non-Resident A and Non-Resident C, therefore, must be funded by government monies to satisfy the requirement. Non-Resident A receives its funding directly from the foreign government. Non-Resident A’s objective is to receive funds of the foreign government allocated for investment, and invest and reinvest those funds in the public interest of the foreign state in such a way so as to make available the necessary financial resources to secure and maintain the future welfare of the foreign state. Therefore, monies that are invested by Non-Resident A are and will remain government monies. Non-Resident C receives its funds from Non-Resident A. As Non-Resident A receives its funding directly from the foreign government, it is established that the monies invested by Non-Resident C are also government monies. As such, Non-Resident D is entirely funded by government monies. The income received by Non-Resident D is distributed to its partners in proportion to their interest. Income received by Non-Resident A is available to the foreign government. In the case of dissolution or liquidation of Non-Resident A, its assets shall devolve upon the foreign government. As such, monies distributed by Non-Resident D to Non-Resident A will remain government monies. Non-Resident C, via Non-Resident B, is wholly owned and guided by Non-Resident A. As such it is required to conduct its activities in a manner consistent with the purposes of Non-Resident A. Non-Resident A has the rights to all capital and profit of Non-Resident B, which means that it has ultimate rights to all capital and profit of Non-Resident C as well. In the event that Non-Resident B or Non-Resident C was to dissolve or liquidate, their assets would ultimately devolve to Non-Resident A. As such, it is satisfied that the monies invested by Non-Resident D will remain government monies. The monies invested by Non-Resident D are and will remain monies of the foreign government, therefore satisfying this condition of sovereign immunity. Condition 3: Non-commercial activity As noted in ATO Interpretive Decision 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. A passive investment is more likely to be considered a non-commercial transaction. 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 investment. 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. In determining whether Non-Resident D’s investments constitute a passive and non-commercial activity, it is necessary to consider the nature of its investments including the extent of its holdings, and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of any entity related to the investments. Non-Resident D is not in the business of trading in equity and debt securities with the intent of deriving profits from the buying and selling of securities. The purpose of Non-Resident D’s investments is to hold a portfolio of stocks as an index in order to gain exposure to listed markets. The income received from the current and proposed passive investments will be: ● Rental income, ● Interest income, ● Dividend income, ● MIT fund payments, ● Other trust distributions, and ● Gains arising on the disposal of securities. Are the current investments of Non-Resident D in Australia non-commercial activities? Non-Resident D currently holds a number of investments in listed property securities and funds in Australia. The current investments represent holdings of less than 1% of the equity market capitalisation of each of the property securities and funds that are held. The following factors are relevant as to determining whether Non-Resident D’s current investments are commercial activities: ● All securities are listed on the ASX or another recognised stock exchange, ● Non-Resident D, along with any related party, has a combined holding of less than 1% of the equity securities of each issuer, ● Neither Non-Resident D, nor any related party, has any involvement in the day to day management of the issuing entity’s business, ● Neither Non-Resident D, nor a related party, has any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which the Non-Resident D may have acquired units, ● Neither Non-Resident D, nor a related party, has any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and ● Non-Resident D, along with any related party, only have rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. The above factors demonstrate that Non-Resident D’s current investments are passive investments, and therefore non-commercial activities, satisfying the condition. Are the proposed investments of Non-Resident D in Australia non-commercial activities? In the future, Non-Resident D proposes to invest in Australian equity securities. Future investments made by Non-Resident D in Australian equity securities will conform to the following parameters: ● All securities will be listed on the ASX or another recognised stock exchange, ● Non-Resident D, along with any related party, will have a combined holding of less than 10% of the equity securities of the issuer, ● Neither Non-Resident D, nor any related party, will have any involvement in the day to day management of the issuing entity’s business, ● Neither Non-Resident D, nor a related party, will have any right to representation on the board of an equity issuer, which includes the board of the corporate trustee of a unit trust in which Non-Resident D may acquire units, ● Neither the Non-Resident D, nor a related party, will have any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and ● Non-Resident D, along with any related party, will only have rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. Investments made within the parameters above are passive investments, and therefore would be considered to be non-commercial investments. Non-Resident D’s future investments into Australia will therefore satisfy the requirement of being a non-commercial activity. Given the above factors, the Commissioner accepts that the current investments of Non-Resident D and its prospective investments which are made within the above parameters satisfy this third condition in relation to the application of the common law doctrine of sovereign immunity. | Detailed Reasoning - Conclusion: As the three conditions have been satisfied, Non-Resident D will be immune from income taxes and withholding taxes on all income and gains it derives from its current investments in Australia and its proposed investments which are made in accordance with the parameters above under the common law doctrine of sovereign immunity.