Private ruling: Doctrine of sovereign immunity
Date of advice: 20 February 2017
Published: July 2017

Ruling: Q1: Will the Australian Taxation Office (ATO) impose a liability to income tax or withholding tax on income derived by the agency of government of the foreign country? | A1: No

Relevant facts and circumstances: The agency of government of the foreign country (agency) is governed in accordance with the law that provides the set of rules including its objectives and functions. The government is responsible for the planning and the implementing of the country's economic policy and the agency supports those functions. The agency's objectives as set out in the law, includes, support objectives of the country's economic policy, especially growth, employment and reducing social gaps. The agency is a sovereign entity performing sovereign functions and it is not engaged in any commercial activities, anywhere in the world. The agency is required to annually distribute profits to the government in accordance with the law. The agency has provided a list of Australian equities. The list shows a shareholding of less than 10 of the total shares in each company. Further, the agency will not have any influence on the management of the relevant companies; and will not appoint a director to the board of directors of the companies on the list provided to the ATO. The agency is expected to derive income in the form of dividends and capital gains from its Australian investments in Australian equities.


Reasons for decision: Detailed Reasoning - Sovereign immunity background: The Foreign States Immunities Act 1985 (Immunities Act) is an Australian Commonwealth Act which reflects a more restrictive view of the common law doctrine of sovereign immunity. The ATO follows the principles delineated in the Immunities Act which represents Australia's restrictive approach when considering sovereign immunity claims to taxation matters. Pursuant to this approach, an entity claiming sovereign immunity must satisfy three conditions: 1. the entity must be a foreign state, or a separate entity of a foreign state 2. the monies being invested in the scheme are and will remain government monies, and 3. the scheme to which the claim applies must not be a commercial transaction. If these three conditions are satisfied, it has been the long-standing practice of the ATO to not impose a liability to income tax and withholding tax in respect of ordinary income and statutory income on the basis that the entity has satisfied the common law doctrine of sovereign immunity. | Detailed Reasoning - Condition 1: a foreign state or separate entity of a foreign state: A claim for sovereign immunity may only be made by a 'foreign state' (section 9 of the Immunities Act). A foreign state is defined in section 3 of the Immunities Act to be a country outside of Australia that is either: a) an independent sovereign state, or b) a separate territory (whether or not it is self-governing) that is not part of an independent sovereign state. Sovereign immunity also extends to a 'separate entity' of a foreign state pursuant to section 22 of the Immunities Act. A separate entity of a foreign state is defined in section 3 of the Immunities Act to be a natural person, body corporate or corporation sole that: a) is an agency or instrumentality of the foreign State, and b) is not a department or organ of the executive government of the foreign State. In view of the facts provided, it is considered that the agency it is a foreign state or a separate entity of a foreign state. | Detailed Reasoning - Condition 2: the monies being invested in the scheme are and will remain government monies: In view of the facts provided, it is considered that the monies being invested by the agency in the scheme are and will remain government monies. | Detailed Reasoning - Condition 3: the scheme to which the claim applies must not be a commercial transaction: An investment undertaken by a foreign government or an agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government. However, it is necessary to establish whether the investment is non-commercial in nature and this will depend on the particular circumstances of the investment. 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 (i.e., a holding of 10 per cent or less of the equity in a company) will generally be accepted as a non-commercial activity and any dividends received from such a holding would be exempt from tax. There also must be no directors on the Board of Directors of the company. In view of the facts provided, it is considered that the Australian investments in Australian equities would be of a non-commercial in nature. Accordingly, ATO will not impose a liability to income tax or withholding tax on income derived by the agency of government of the foreign country.