Private ruling: sovereign immunity
Published: July 2013

Ruling: Q1:  | A1:  | Q2:  | A2:  | Q3:  | A3: Your ruling is based on the following facts The foreign government entity is owned and controlled by the foreign government to invest funds on behalf of several public employees' retirement funds.



Reasons for decision: Summary: While the taxation legislation itself does not provide exemption specifically for foreign governments, the Australian government does recognise the international law doctrine of sovereign immunity and will provide exemption on investments of foreign governments and monetary authorities of foreign governments where the monies being invested are and will remain government monies (for example, investment of foreign reserve assets) and are invested in passive (that is, non-commercial) type investments. This is usually regarded as meaning investment at interest in traditional instruments such as bonds or a portfolio (that is, a holding of 10% or less of the equity in a company) holding of shares. Certain income derived from within Australia by foreign governments is exempt from Australian 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 tax. 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 which 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, 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 (less than 10%) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax. In summary, to establish that sovereign immunity applies to exempt dividend and interest income from withholding tax, it is necessary to establish the following: | 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. In order to determine whether the fund is an agency of a foreign government the answer in each case is to be found by examining the body in question, studying the statute establishing it and considering whether its purposes, functions and the degree of governmental control. The entity is an agency of a foreign government by statute | Detailed Reasoning - Condition 2: That the moneys being invested are and will remain government moneys. The monies invested belongs to a government controlled investment fund. The foreign government entity has established that the moneys invested are and will remain government moneys. | Detailed Reasoning - Condition 3: That the income is being derived from a non-commercial activity. Commercial activities are not precisely defined and are dependent upon the facts and circumstances of each case. The investments of the foreign government entity in Australia are considered to be of a passive and non-commercial nature. The income is being therefore derived from non-commercial activities. Accordingly, an exemption under the principles of sovereign immunity for income tax including dividend and interest withholding tax and sundry other income is available.

Subject: sovereign immunity: Question 1 Is the foreign government entity entitled to an exemption from liability to interest withholding tax under the common law principle of sovereign immunity in respect of interest derived from debt instruments, provided that the entity is deriving this interest income from passive debt instruments and not from any commercial activity (in particular from the business of money lending)? | Question 2 . Is the foreign government entity entitled to an exemption from liability to dividend withholding tax under the common law principle of sovereign immunity in respect of its passive portfolio investments (i.e. investments in which the entity holds less than 10% of the total interests)? | Question 3 . Is the foreign government entity entitled to an exemption from liability to income tax under the common law principle of sovereign immunity in respect distributions from passive investments in widely held management investment funds or unit trusts in which the entity holds less than 10% of the total fund? | that the moneys being invested are and will remain government moneys; and