Private ruling: Sovereign immunity
Date of advice: 29 January 2016
Published: March 2016
Ruling period: Years ending 30 June XXXX to XXXX
Date scheme commenced: During the year ended 30 June XXXX.

Ruling: Q1: Will Entity A be immune from income and withholding taxes under the common law doctrine of sovereign immunity in relation to its investment in Australian entities on: • interest received on a loan advanced to an Australian entity • distributions received from an Australian entity, and • any gains made by Entity A on the disposal of its interest in the Australian entity. | A1: Yes.

Relevant facts and circumstances: 1. Entity A was established by a foreign government in accordance with a statute. 2. Entity A is a resident of the foreign country for income tax purposes and is exempt from tax in that foreign country. 3. Entity A was established by the foreign government to meet certain obligations under the statute. 4. The Board of directors of Entity A is appointed by the foreign government. 5. Entity A must provide financial statements and reports to the government on its performance. 6. Entity A collects monies as provided for under the statute to meet its obligations under the statute. 7. On dissolution of Entity A, all monies will be retained by the foreign government. 8. Entity B was established by the foreign government under a statute. 9. Entity B will use monies provided by Entity A to invest in Australian entities. 10. Entity B will also advance a loan to an Australian entity. The loan does not create any special rights that would allow it to influence the Australian entity. 11. Entity A is not entitled to appoint a director to the Board of directors of any Australian entity in which it holds an interest. Entity A is not entitled to appoint an observer to the Board of any Australian entity. 12. Entity A is not involved in the day to day management of the business of any Australian entity.

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 common law doctrine of sovereign immunity applies to foreign governments 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 being invested are and will remain government moneys, and 3. that the income is being derived from a non-commercial activity. If these three conditions are satisfied, the Australian sourced income and/or gains will not be subject to Australian income and/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: Entity A was established by a foreign government in accordance with a statute. Entity B is an entity that was established under a statute by the foreign government and is used by Entity A to make investments for it. Accordingly, as Entity A and Entity B are governmental entities, the condition that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government is satisfied. Condition 2 - that the moneys invested are and will remain government moneys Entity A was established with foreign government monies and receives monies under a specific Act for the purposes of meeting its obligations under that Act. Entity A is managed and controlled by a Board of directors appointed by the foreign government. Entity A and its assets are wholly-owned by the foreign government. On dissolution, the funds of Entity A will be retained by the foreign government. Accordingly, Entity A's monies are and will remain the monies of the foreign government. Therefore, this condition is satisfied. | 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. In determining whether Entity A's investment through Entity B in the Australian entities constitutes a non-commercial activity, it is necessary to consider the extent of its holding and the degree of its actual or potential influence in respect of the financial, operating and policy decisions of the entities. Entity B will acquire shares and units in Australian entities, being Australian entities from which it will receive distributions. Those distributions will flow through to Entity A which will also make gains or losses on the disposal of its interests in the Australian entities. Entity B will also advance a loan to an Australian entity. The loan does not create any special rights that would allow it to influence the business conducted by the Australian entity. Entity A is not entitled to appoint a director to the Board of any Australian entity in which it holds an interest. Entity A is not entitled to appoint an observer to the Board of directors of any Australian entity. Entity A is not involved in the day to day management of the business of any Australian entity. It is accepted that Entity A's indirect holdings in the Australian entities constitutes a non-commercial activity. It is also accepted that the loans provided to the Australian entities constitutes a non-commercial activity. Further, it is considered that when viewed together, the combined investment (comprised of holdings in the Australian entities and the loan advanced to the Australian entity is also non-commercial in nature. | Detailed Reasoning - Conclusion: The three conditions in relation to Entity A's indirect investment in the Australian entities are satisfied. Accordingly, Entity A will be immune from income and withholding taxes on interest received on the loan advanced to the Australian entity, distributions received from the Australian entities, and any gains made by Entity A on the disposal of its indirect interest in the Australian entities under the common law doctrine of sovereign immunity.