As I discuss in my forthcoming article Sovereign Wealth Funds and Corporate Governance: Evidence and Policy, the US affords favorable tax treatment to SOEs and SWFs, provided they play by certain rules:
Under Section 892 of the Internal Revenue Code, income earned by foreign governments on investments in the United States in stocks, bonds, or other domestic securities, financial instruments held in the execution of governmental financial or monetary policy, or interest on deposits in banks in the United States, is exempt from taxation. The exemption provided under § 892 does not apply to commercial activity, however, with the justification that as an extension of the doctrine of sovereign immunity, § 892’s exemption should be limited to activities that are related to sovereign activities of the government. The definition of commercial activity under § 892 turns on whether income was received from a controlled commercial entity, a term defined to mean
“any entity engaged in commercial activities (whether within or outside the United States) if the government (i) holds (directly or indirectly) any interest in such entity which (by value or voting interest) is 50 percent or more of the total of such interests in such entity, or (ii) holds (directly or indirectly) any other interest in such entity which provides the foreign government with effective control of such entity.”
Because “effective control” may come at shareholdings significantly below 50%, SWFs have a tax incentive to avoid making investments that might trigger tax liability under § 892.
 I.R.C. § 892 (2006).
 This explicit distinction was codified by the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. § 1602 (2006); for a discussion of the development of the Foreign Sovereign Immunities Act and § 892, see N.Y. State Bar Ass’n Tax Section, Report on the Tax Exemption for Foreign Sovereigns under Section 892 of the Internal Revenue Code 14–16 (June 2008), http://www.nysba.org/Content/ContentFolders20/TaxLawSection/TaxReports/1157report.pdf .
 I.R.C. § 892(a)(2)(B).
Some (including politicians) have argued that the US should not give favorable tax treatment to SWFs because they are purportedly engaged in commercial activity, rather than “sovereign” activity. This is what we call putting out the “unwelcome” mat. Contrast this with the position of Australia, as reported on Lexology:
In keeping with its goal of encouraging more foreign investment into Australia, the Federal Government will change existing laws to ensure foreign pension and sovereign wealth funds can access the Managed Investment Trust (MIT) withholding tax regime.
In summary, the regime allows a MIT to make payments to non-residents at concessional withholding tax rates, offering an attractive Australian investment option for foreign funds where they and their members are ultimately based overseas.
Popularity of MITs in Australia
The use of MITs in Australia is growing rapidly. In the superannuation industry alone, the value of savings under management has exploded from $183 billion in 1993 to $1.5 trillion today.
As at 1 January 2010, 17.6% of all inflows to Australian MITs came from foreign pension and sovereign wealth funds. By 31 December 2011, this figure had grown to 26%.