Private ruling: Sovereign Immunity
Date of advice: 14 December 2017
Published: May 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
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Entity A 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 investments in Australia listed in Document A (‘list of current investments’), and b) its future investments in Australia when made within the parameters contained in paragraphs 16, 17 and 18 of the relevant facts and circumstances of this Ruling. | A1: Yes.

Relevant facts and circumstances: Entity A 1. Entity A is a public institution owned, established and supervised by a foreign government. 2. Entity A manages a global investment portfolio in a wide range of asset classes. 3. Entity A’s primary objective is to invest funds and deliver sustained long-term financial returns for the foreign government. Entity A receives its funds from the foreign government. 4. Entity A carries out its investment program independently and without reference to the foreign government or other entities that also invest funds on the foreign government’s behalf. 5. Entity A’s Board of Directors comprise of a chairman and board members who are appointed by the foreign government. 6. Any monies given to Entity A, or income made by Entity A, are ultimately owned by the foreign government. The foreign government is able to recall any monies of Entity A or its subsidiaries at any time. In the event Entity A is liquidated or dissolved, all monies will flow back to the foreign government. Current investments 7. Entity A’s investment decisions are based solely on economic objectives. This includes delivering sustained long-term fixed returns. 8. The asset types that are currently held by Entity A in Australia are equity investments, debt investments and derivative instruments. The list of current investments forms part of the Scheme to which this Ruling relates. 9. Entity A 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. 10. All of the equity investments Entity A hold which are detailed in the list of current investments have the following characteristics: a) All securities are listed on the Australian Securities Exchange (‘ASX’) or another recognised stock exchange b) Entity A, along with any related party, has a combined holding of less than 10% of the equity securities of the issuer c) Neither Entity A, nor any related party, has any involvement in the day to day management of the issuing entity’s business d) Neither Entity A, 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 Entity A may have acquired units e) Neither Entity A, nor a related party, has any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and f) Entity A, along with any related party, has rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. 11. The debt investments Entity A hold which are detailed in the list of current investments are a mixture of bonds, deposit certificates, and commercial papers. 12. These debt investments have the following characteristics: a) The debt securities provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business b) All debt securities have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange c) The debt securities have broad financial covenants, and do not allow Entity A to have any influence or control over the debt issuer’s management. The covenants are in accordance with industry standard d) The debt securities do not provide any right or option for conversion to equity at any time, and e) Entity A has not negotiated the terms of the debt securities and has purchased them on a standard basis as part of a public offering. 13. Financial derivatives are held by Entity A. The purpose of the derivative investments which are detailed in the list of current investments is to obtain market exposure through exchanged traded futures. 14. Entity A is currently in receipt of the following types of Australian source income: a) Interest income b) Franked dividend income c) Unfranked dividend income, and d) Australian sourced capital gains income. Future investments 15. Entity A proposes to continue to invest in a similar class of asset types in Australia that will include equity investments, debt investments and derivative instruments. 16. Entity A will make further equity investments into Australia, including potential investments into Managed Investment Trusts (‘MITs’), that will conform with the following parameters: a) All securities will be listed on the ASX or another recognised stock exchange b) Entity A, along with any related party, will have a combined holding of less than 10% of the equity securities of the issuer c) Neither Entity A, nor any related party, will have any involvement in the day to day management of the issuing entity’s business d) Neither Entity A, 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 Entity A may acquire units e) Neither Entity A, 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) Entity A, 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. 17. Entity A will make further debt investments in Australia that will conform with the following parameters: a) The debt securities will provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business b) All debt securities will have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange c) The debt securities will have broad financial covenants, and will not allow Entity A to have any influence or control over the debt issuer’s management. The covenants will be in accordance with industry standard d) The debt securities will not provide any right or option for conversion to equity at any time, and e) Entity A will not negotiate the terms of the debt securities and will purchase them on a standard basis as part of a public offering. 18. Entity A will make further investments in derivative instruments in Australia to obtain market exposure through exchanged traded futures.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1 | Income Tax Assessment Act 1997 subsection 995-1(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 also 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 provide immunity from Australian income tax and/or withholding tax on Australian sourced income and gains, it is necessary to establish all of 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, and 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 therefore deriving the income is a foreign government or agency of a foreign government Entity 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(1) of the Income Tax Assessment Act 1997 (‘ITAA 1997’). Entity A is wholly owned by the foreign government and is subject to its supervision. Entity A itself does not undertake any other activities besides investing the financial surplus resources of the foreign government. Entity A exercises the authority to invest government money which, together with any returns, will ultimately be for the benefit of the foreign government. Entity A’s Board of Directors comprises of a chairman and board members who are appointed by the foreign government. Although Entity 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 for private profit. The foreign government may withdraw funds from Entity A at any time in order to meet governmental functions. The factors considered above demonstrate that Entity A is and will be exercising governmental functions and is owned and controlled by the foreign government. Accordingly, Entity A constitutes an 'agency of a foreign government' and satisfies this condition. Condition 2: That the monies invested 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. Entity A must therefore establish that the monies it invests are and will remain government monies. Entity A receives its funding directly from the foreign government. Its objective is to receive funds from the foreign government allocated for investment, and invest and reinvest those funds in the public interest of the foreign country in such a way so as to make available the necessary financial resources to secure and maintain the future welfare of the foreign country. In the event Entity A is liquidated or dissolved, all monies will flow back to the foreign government. It is therefore established that the funds invested by Entity A will remain the property of the foreign government and will revert to the ultimate ownership of the foreign government in the case of liquidation or dissolution. From the above reasons, Entity A satisfies this condition that the monies invested by Entity A are and will remain monies of the foreign government. Condition 3: That the income or gain is being derived from a non-commercial activity When determining whether the doctrine of sovereign immunity applies to provide immunity for Australian sourced income and gains from Australian income tax and/or withholding tax, it is necessary to establish that the income or gain is being derived from a 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. Current investments As detailed in the list of current investments, the asset types that are currently held by Entity A in Australia are equity investments, debt investments and derivative instruments. The relevant characteristics of these investments are as follows: | Detailed Reasoning - Equity Investments: ● All securities are listed on the ASX or another recognised stock exchange ● Entity A, along with any related party, has a combined holding of less than 10% of the equity securities of the issuer ● Neither Entity A, nor any related party, has any involvement in the day to day management of the issuing entity’s business ● Neither Entity A, 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 Entity A may have acquired units ● Neither Entity A, nor a related party, has any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and ● Entity A, along with any related party, has rights to vote as a shareholder or unitholder in proportion to their equity interest in the relevant entity. | Detailed Reasoning - Debt Investments: ● The debt securities provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business ● All debt securities have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange ● The debt securities have broad financial covenants, and do not allow Entity A to have any influence or control over the debt issuer’s management. The covenants are in accordance with industry standard ● The debt securities do not provide any right or option for conversion to equity at any time, and ● Entity A has not negotiated the terms of the debt securities and has purchased them on a standard basis as part of a public offering. Financial derivatives are held by Entity A. The financial futures derivatives are held to obtain market exposure through exchanged traded futures. Based on the facts and circumstances detailed above, the Commissioner accepts the income or gain being derived from Entity A’s current investments is from a non-commercial activity. Future investments Entity A proposes to make further investments in Australia into the future. These investments will conform to the following parameters: | Detailed Reasoning - Equity Investments (including potential investments in MITs): ● All securities will be listed on the ASX or another recognised stock exchange ● Entity A, along with any related party, will have a combined holding of less than 10% of the equity securities of the issuer ● Neither Entity A, nor any related party, will have any involvement in the day to day management of the issuing entity’s business ● Neither Entity A, 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 Entity A may acquire units ● Neither Entity A, nor a related party, will have any right to representation on any investor representative or advisory committee (or similar) of any equity issuer, and ● Entity A, 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. | Detailed Reasoning - Debt Investments: ● The debt securities will provide no rights to representation, no voting rights, and no ability to influence the security issuer or its business ● All debt securities will have been issued by either the Australian Government, an Australian State Government owned issuer or a corporate entity listed on the ASX or another recognised stock exchange ● The debt securities will have broad financial covenants, and do not allow Entity A to have any influence or control over the debt issuer’s management. The covenants will be in accordance with industry standard ● The debt securities will not provide any right or option for conversion to equity at any time, and ● Entity A will not negotiate the terms of the debt securities and will purchase them on a standard basis as part of a public offering. Entity A will continue to invest in financial derivative instruments. The financial derivatives that will be held will be through exchanged traded futures to obtain market exposure. Based on the facts and circumstances detailed above, the Commissioner accepts the income or gain to be derived from Entity A’s future investments will be from a non-commercial activity. | Detailed Reasoning - Conclusion: As the three conditions of sovereign immunity have been satisfied, Entity A will be immune from income taxes and withholding taxes on all income and gains it derives from its investments listed in the list of current investments, as well as its future investments (subject to the parameters contained in paragraphs 16, 17 and 18 of the relevant facts and circumstances of this Ruling), under the common law doctrine of sovereign immunity.