Private ruling: Sovereign Immunity
Published: February 2014
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the non-resident entity subject to interest withholding tax under subsection 128B(2) of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of interest income derived in Australia? | A1: No. | Q2: Is the non-resident entity subject to dividend withholding tax under subsection 128B(1) of the ITAA 1936 in respect of dividend income derived in Australia? | A2: No. | Q3: Is the non-resident entity subject to pay income tax under section 4-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on: · interest income derived from debt instruments and / or gains from the sale of those debt instruments · dividend income derived from equities and /or gains on the sale of those equities, and · trust distributions from real estate investment trusts and / or gains from the sale of units in real estate investment trusts? | A3: No.

Relevant facts and circumstances: 1. The non-resident entity is a separate entity of a foreign state. 2. The non-resident entity has several Australian investments. 3. The Australian investments comprise of bonds, notes, equities and holdings in real estate investment trusts. 4. The Australian investments are held for various lengths of time with the majority of debt holdings held to maturity. 5. The non-resident entity is not represented on any Board of Directors of the corporations in which it has invested. 6. The non-resident entity does not have influence in operating the businesses in which it has invested. 7. The non-resident entity derives interest income from its Australian investments. 8. The non-resident entity derives dividend income from its Australian investments. 9. The non-resident entity may derive gains from its Australian investments. 10. Income received by the non-resident entity from the Australian investments is distributed annually by the non-resident entity to its foreign government to fund and support general governmental functions.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 128B(1) | Income Tax Assessment Act 1936 subsection 128B(2) | Income Tax Assessment Act 1997 section 4-1 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Liability to interest withholding tax: A non-resident that derives interest income from a resident of Australia is liable to withholding tax under subsection 128B(2) of ITAA 1936 unless an exclusion applies. However, if the non-resident is a foreign state or a separate entity of a foreign state, then consideration needs to be given to the common law doctrine of sovereign immunity. | Detailed Reasoning - Sovereign immunity background: The Foreign States Immunities Act 1985 (Immunities Act) is an Australian Commonwealth Act which reflects the restrictive view of the common law doctrine of sovereign immunity. It has been long-standing practice for the Australian Taxation Office (ATO) to follow the principles delineated in the Immunities Act to apply the more restrictive view of the doctrine of sovereign immunity when considering 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 scheme to which the claim applies must not be a commercial transaction, and 3. the monies being invested in the scheme are and will remain government monies. If these three conditions are satisfied, it has been the long-standing practice of the ATO to not impose the entity's liability to withholding tax in respect of dividend and interest 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: · an independent sovereign state, or · 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: · is an agency or instrumentality of the foreign state; and · is not a department or organ of the executive government of the foreign state. The Full Federal Court Decision in PT Garuda Indonesia Ltd v. Australian Competition and Consumer Commission [2011] FCAFC 52 considered when an entity may be an agency or instrumentality of the foreign state. The court decided (at paragraph 128), that the correct approach is to consider, on the whole of the evidence, whether the person is acting for, or being used by, the foreign state as its means to achieve some purpose or end of that state in the relevant circumstances. | Detailed Reasoning - Is the non-resident entity a 'foreign state' or 'separate entity' of a foreign state?: In carrying out its duties, the non-resident entity may be considered to be an agency or instrumentality of a foreign state and consequently a separate entity of a foreign state. | Detailed Reasoning - Condition 2: commercial transaction: Under section 11 of the Immunities Act, a foreign state does not enjoy sovereign immunity in so far as the proceeding concerns a commercial transaction. As suggested by the High Court in the PT Garuda Case at paragraph 5, the necessity for sovereign immunity to be excluded from commercial transactions came about as a result of governments increasingly becoming engaged in various commercial activities and that immunity of governments involved in commercial activities was inconsistent with international law and it was undesirable. As a result, Australia accepts that foreign states performing only governmental functions, rather than undertaking commercial transactions, may claim sovereign immunity. This approach is consistent with the decision of the British House of Lords in I Congreso del Partido [1981] 2 All ER 1064, where it was held that activities of a trading, commercial or other private law character were not governmental functions. Whether an operation or activity is a commercial transaction will depend on the facts of each particular case. As a guide, a commercial transaction 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. | Detailed Reasoning - Are the non-resident entity's investments commercial transactions?: The long term nature of the non-resident entity's investments, the limited holding amounts and the lack of representation and influence in the businesses in which it invests illustrate the passive nature of the investments. Therefore, the scheme to which the non-resident entity's claim for sovereign immunity applies is not a commercial transaction. | Detailed Reasoning - Condition 3: monies 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 in the scheme are and will remain government monies. The monies that are invested by the non-resident entity are and will remain government monies. | Detailed Reasoning - Conclusion: Since the three conditions are satisfied, the non-resident entity's claim for sovereign immunity on its Australian investments has been established. In line with long-standing practice, the ATO will not impose liability to withholding tax in respect of the interest income received from non-resident entity's Australian investments. | Detailed Reasoning - Question 2: Is the non-resident entity subject to dividend withholding tax under subsection 128B(1) of the ITAA 1936 in respect of dividend income derived in Australia? | Detailed Reasoning - Liability to dividend withholding tax: A non-resident that derives dividend income from a resident of Australia is liable to withholding tax under subsection 128B(2) of ITAA 1936 unless an exclusion applies. However, if the non-resident is a foreign state or a separate entity of a foreign state, then consideration needs to be given to the common law doctrine of sovereign immunity. | Detailed Reasoning - Conclusion: As determined in question 1, the non-resident entity's claim for sovereign immunity on its Australian investments has been established. In line with long-standing practice, the ATO will not impose liability to withholding tax in respect of the dividend income received from non-resident entity's Australian investments. | Detailed Reasoning - Question 3: Is the non-resident entity subject to pay income tax under section 4-1 of the ITAA 1997 on: · interest income derived from debt instruments and / or gains from the sale of those debt instruments · dividend income derived from equities and /or gains on the sale of those equities, and · trust distributions from real estate investment trusts and / or gains from the sale of units in real estate investment trusts? | Detailed Reasoning - Liability to income tax: A non-resident that derives income from a resident of Australia is liable to income tax pursuant to section 4-1 of ITAA 1997. However, if the non-resident is a foreign state or a separate entity of a foreign state, then consideration needs to be given to the common law doctrine of sovereign immunity. Certain income derived from within Australia by foreign governments is not subject to 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 not subject to Australian tax. | Detailed Reasoning - Conclusion: Accordingly, as determined in Question 1, non-resident entity's has satisfied the three conditions necessary to claim sovereign immunity on its Australian investments. Since this claim for sovereign immunity has been established, it has been long-standing practice that the ATO will not impose Australian tax in respect of the income received from the non-resident entity's Australian investments.

Is the non-resident entity subject to interest withholding tax under subsection 128B(2) of the ITAA 1936 in respect of interest income derived in Australia?