Private ruling: Sovereign Immunity
Date of advice: 25 February 2016
Published: April 2016
Ruling period: From XXXX to XXXX
Date scheme commenced: XXXX

Ruling: Q1: Is Entity A exempt from Australian income and withholding taxes for: • interest received from Australian fixed income securities, • dividends received from Australian shares, and • gains made by it from the disposal of the Australian shares under the common law doctrine of sovereign immunity? | A1: Yes.

Relevant facts and circumstances: 1. Entity A was established by a foreign government in accordance with a statute to perform governmental functions. 2. Entity A was established with moneys of the foreign government. 3. Entity A receives money from the foreign government to invest on its behalf. 4. Entity A is managed and controlled in accordance with foreign government laws. 5. On liquidation of Entity A, any remaining moneys and/or assets will remain assets of the foreign government. 6. Entity A owns fixed income securities from which it derives Australian sourced interest income. 7. Entity A owns shares in Australian companies from which it receives dividends. Entity A will also make gains on the disposal of those shares. 8. Entity A is not in the business of money lending. 9. Each shareholding held by Entity A in each Australian company is less than 10% of the total shares on issue for each company. 10. Entity A is not entitled to and therefore has not appointed a director to the Board of Directors of any of the Australian companies in which it holds shares.

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

Reasons for decision: Summary: 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. When 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 moneys invested are and will remain government moneys; and 3. that the income or gain is being derived from a non-commercial activity. If these three conditions are satisfied, the income and/or gains will not be subject to Australian income tax and/or withholding tax. | 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: Entity A was established by a foreign government in accordance with a statute to perform governmental functions. Therefore, the person making the investment, and therefore, deriving the income is a foreign government or an agency of a foreign government. Condition 2 - that the moneys invested are and will remain government moneys Entity A was established with moneys of the foreign government. Entity A receives money from the foreign government to invest on its behalf. Entity A is managed and controlled in accordance with foreign government laws. On liquidation of Entity A, any remaining moneys and/or assets will remain assets of the foreign government. Therefore, the moneys invested are and will remain government moneys. | Detailed Reasoning - Condition 3 - that the income or gain is being derived from a non-commercial activity: 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. However, in relation to the holding of shares in a company, or units in a unit trust, the extent of the relevant holding may give rise to questions as to whether it constitutes a commercial activity, which includes the carrying on of a business. Entity A owns fixed income securities from which it derives Australian sourced interest income. Entity A owns shares in Australian companies from which it receives dividends. Entity A will also make gains on the disposal of those shares. Entity A is not in the business of money lending. Each shareholding held by Entity A in each Australian company is less than 10% of the total shares on issue for each company. Entity A is not entitled to and has therefore not appointed a director to the Board of Directors of any of the Australian companies in which it holds shares. Therefore, it is considered that Entity A's investments in Australian fixed income securities and shares are not commercial in nature. | Detailed Reasoning - Conclusion: As the three conditions for immunity under the common law doctrine of sovereign immunity are satisfied, Entity A will be immune from Australian income and withholding taxes for interest received on Australian fixed income securities, dividends received from Australian shares and gains made by it from the disposal of the Australian shares.