Private ruling: Sovereign Immunity
Published: August 2013
Ruling period: 1 July 2013 - 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the Entity entitled to an exemption from Australian income tax (including withholding taxes) under the common law principle of sovereign immunity in respect of any income or capital gains derived from its Australian investments? | A1: Yes.

Relevant facts and circumstances: The Entity is a government agency. The Entity is a state body The Entity is governed by a Board of Directors, which is appointed by the government. The Entity was established by the government, and must report to the government. Part of the Entity's functions is to administer certain funds (Funds) and to invest it on behalf of the government. The beneficial owner of the Funds is the government. Australian assets The Entity has used the Funds to purchase certain assets in Australia; none of the investments giving the Entity a controlling interest in the relevant entities.


Reasons for decision: Summary: Certain income derived from within Australia by foreign governments is exempt from Australian income 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 income tax (including withholding taxes). 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 where it was 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 relation to a holding of shares in a company or units in a fund, there would be instances where the extent of the holding gives rise to questions as to whether it constitutes a passive investment or the carrying on of a business, but this would depend on the particular circumstances. A portfolio holding in a company or fund (i.e., a holding of 10 per cent or less of the equity in a company or units in a fund) will generally be accepted as a non-commercial activity and any dividends or interest received from such a holding would be exempt from Australian income tax. According to ATOID 2002/45, to establish that sovereign immunity applies to exempt dividend and 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. If these three conditions are satisfied, then the dividend and interest income will not be subject to Australian income or withholding taxes. | 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 Entity is a government agency; it was established by the government, reports to the government and is controlled by the government. | Detailed Reasoning - Condition 2: · that the moneys being invested are and will remain government moneys, and The Funds belong to the government. Therefore the Funds that are invested by the Entity are and will remain government moneys. | Detailed Reasoning - Condition 3: · that the income is being derived from a non-commercial activity. The nature and scale of the Entity's use of the Funds to purchase the Australian assets do not point to a commercial activity. Hence, the income from its investment is derived from a non-commercial activity. | Detailed Reasoning - Conclusion: As the three conditions set out in ATOID 2002/45 are satisfied, the Entity is eligible for exemption from Australian income tax and withholding tax in relation to the income from its investment in the Australian assets.