Private ruling: Sovereign Immunity
Date of advice: 13 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: June 2017

Ruling: Q1: Is Foreign Corporate Trustee (‘FCT’), as trustee for Foreign Unit Trust (‘FUT’), immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investment in Project Asset Trust (‘PAT’) from the date that it became trustee? | A1: Yes. | Q2: Is Foreign Company (‘FC’) immune from income tax and withholding tax under the common law doctrine of sovereign immunity on any income and capital gains derived from its current investment in Project Operating Trust (‘POT’)? | A2: Yes.

Relevant facts and circumstances: 1. The Sovereign Fund is a sovereign wealth fund established in a foreign State to advance the objectives of the Government of the State and is recognised as a government authority of the State . 2. The funds used by the Sovereign Fund in all of its investments are reserve funds of the State. 3. The income generated by the Sovereign Fund on the investment of the State reserve funds is either re-invested or distributed to the Government of the State. 4. No distributions of income or gains from the Sovereign Fund have been made or can be made to any person other than the Government of the State. 5. The Sovereign Fund is resident in the State for income tax purposes and is not subject to income tax in the State. 6. The Sovereign Fund is not a tax resident in Australia. In particular, the Sovereign Fund has neither its central management and control in Australia nor is the Sovereign Fund’s voting power controlled by Australian residents. The Project 7. The Sovereign Fund, through wholly-owned subsidiary entities, is a member of a consortium (‘the Consortium’) that has invested in the Project. 8. The Project involves a long term Australian investment by the Consortium. 9. The Consortium’s investments are made into the PAT and the POT. The Sovereign Fund Holding Structure 10. The Sovereign Fund is authorised to incorporate companies and establish investment enterprises, individually or with others, to invest in the State and abroad. 11. For the purposes of its investment in the Project, the Sovereign Fund has established the following entities: • FC • FUT • FCT FC 12. FC is a company which was not incorporated in Australia. 13. FC is a wholly owned subsidiary of another wholly owned subsidiary of the Sovereign Fund. FC was established as a special purpose vehicle to hold the Sovereign Fund’s investment in the Project. 14. FC is not a tax resident in Australia and is not subject to income tax in the foreign State, whether directly or indirectly. 15. FC does it have a permanent establishment in Australia under subsection 6(1) of the Income Tax Assessment Act 1936 . 16. FC owns xx.xx% of the units in POT. 17. FC owns 100% of the units in FUT. 18. FC has no other Australian investments aside from its investment in the Project. 19. FC is not in the business of money lending. However, FC has provided an interest bearing investor loan to POT. The loan arrangement has been entered into on ordinary commercial terms. FCT and FUT 20. FCT is a company which was not incorporated in Australia. 21. FCT is a special purpose vehicle established to be the trustee of the FUT. 22. FUT is a unit trust. FCT is not a tax resident in Australia and is not subject to income tax in the foreign State, whether directly or indirectly. 23. All of the units in FUT are owned by FC. 24. FCT and FUT are not tax residents of Australia nor do they have a permanent establishment in Australia under subsection 6(1) of the Income Tax Assessment Act 1936 . 25. In its capacity as trustee of FUT, FCT owns xx.xx% of the units in PAT. 26. FCT does not hold any other Australian investments as trustee for FUT aside from the investment in the Project. 27. Neither FCT nor FUT are in the business of money lending. However, FCT, as trustee for FUT, has provided an interest bearing investor loan to PAT. The loan arrangement has been entered into on ordinary commercial terms. Securityholders Deed (‘SHD’) 28. As part of the Project, FCT and FC entered into the SHD which sets out the rights and obligations of the investors in respect to their investment in the Project. Rights waived under SHD 29. FCT and FC have elected to irrevocably and unconditionally waive their rights in relation to a number of matters under the SHD through Specified Rights Election Notices including the appointment of directors and voting on particular shareholder matters. 30. FCT and FC have waived their rights to appoint directors to the relevant Project Boards and will therefore have no voting influence on Board Reserved Matters or Special Board Reserved Matters. 31. Board Reserved Matters relate to the day to day operations of the Project, such as accounting and tax policies of the Project trusts, other operating agreements, legal proceedings and related party transactions. 32. Special Board Reserved Matters relate to issues that impact the day to day operations of the Project Trusts, such as the appointment of Senior Officers, business plan and business budget. 33. FCT and FC have retained their right to have an observer attend board meetings of the relevant Project Boards. 34. The observer is forbidden to speak during board meetings of the relevant Project Boards. 35. The observer is forbidden to vote during board meetings of the relevant Project Boards. 36. The observer will not provide input into the agenda of board meetings of the relevant Project Boards in advance of such meetings. 37. FC and FCT have elected to irrevocably and unconditionally waive their rights in relation to a number of shareholder voting matters listed in the SHD involving the maximum number of directors, change of financial year end, appointment and replacement of auditors and appointment of valuers. 38. FCT and FC have retained their rights in relation to other shareholder matters.

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 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 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 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. Condition 1: Foreign government or an agency of a foreign government The relevant entities have been established by the foreign State to advance the objectives of the foreign State and are owned by the State. Based on these facts and circumstances, it is accepted that the Sovereign Fund, FCT and FUT are agencies of the Government of the State for sovereign immunity purposes. Condition 2: 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 are and will remain government monies. The funds used by the relevant entities in all of their investments are reserve funds of the State. The income generated by the relevant entities on the investment of the State reserve funds is either re-invested or distributed to the Government of the State. No distributions of income or gains from have been made or can be made to any person other than the Government of the State. As such, it is accepted that the monies invested are and will remain government monies. Condition 3: Non-commercial transaction 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 (ATO ID 2002/45) 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. On the other hand, 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 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 this instance, the percentage ownership is greater than a portfolio holding in a company said to be ‘generally accepted as a non-commercial activity’ in ATO ID 2002/45. 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. Given the proportion of ownership interest held, it is important to consider what influence it has over the decisions made amongst the consortium members. FCT, as trustee for FUT, has elected to irrevocably and unconditionally waive its rights in relation to a number of matters under the SHD which would otherwise allow it to influence decisions pertaining to the operation of the Project Trusts. While they have retained rights to have an observer attend board meetings, the observer is forbidden to speak or vote during board meetings. Further, the observer will not have input into the agenda of board meetings in advance of such meetings. Based on the facts and circumstances, the Commissioner accepts that the investments made are non-commercial activities. Condition 1: Foreign government or an agency of a foreign government The relevant entities have been established by the foreign State to advance the objectives of the foreign State and are owned by the State. Based on these facts and circumstances, it is accepted that the Sovereign Fund and FC are agencies of the Government of the State for sovereign immunity purposes. Condition 2: Monies are and will remain government monies As outlined in Condition 2 of Question 1, the funds used by the Sovereign Fund in all of its investments are reserve funds of the foreign State. Given the holding structure outlined in the facts and the foreign State’s absolute ownership of FC, the Commissioner accepts that the funds invested in POT by FC have ultimately been sourced from the reserves of the foreign State and any income flowing from the investment will be beneficially owned by the foreign State. As such, it is accepted that the monies invested are and will remain government monies. Condition 3: Non-commercial transaction 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 ID 2002/45, 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. On the other hand, 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 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 this instance, the percentage ownership of POT, the point at which FC invests into Australia, is greater than a portfolio holding in a company said to be ‘generally accepted as a non-commercial activity’ in ATO ID 2002/45. 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. Given the proportion of ownership interest held by FC at the consortium level, it is important to consider what influence it has over the decisions made amongst the consortium members. FC has elected to irrevocably and unconditionally waive their rights in relation to a number of matters under the SHD which would otherwise allow it to influence decisions pertaining to the operation of the Project Trusts. While they have retained rights to have an observer attend board meetings, the observer is forbidden to speak or vote during board meetings. Further, the observer will not have input into the agenda of board meetings in advance of such meetings. Based on the facts and circumstances, the Commissioner accepts that the investments made are non-commercial activities.