Chapter INTM332040

Record NumberINTM332040
Published date09 April 2016
  1. The judgement can be found at www. The brief facts are that an Indonesian trading group (Indofood) wished to raise finance using the issue of internationally marketed loan notes. It did so using a Mauritian special purpose vehicle (SPV) Indofood International Finance Ltd because, under the Indonesia-Mauritius Double Taxation Convention (DTC), the rate of Indonesian withholding tax (WHT) on interest was reduced from 20% to 10%. The terms of the loan note issue included a clause that if the Indonesian WHT went above 10% and no “reasonable measure” could be found to avoid the increase, then the Mauritian SPV could redeem the bonds.
  2. Because the Indonesian government decided to terminate its DTC with Mauritius, the WHT rate consequently increased to 20% (for which Indofood was liable) and Indofood sought to initiate the get-out clause. JP Morgan, as Trustee/Paying Agent for the bondholders, refused to accept this, on the basis that Indofood could set up a Dutch SPV to perform the same function but utilising the Indonesia/Netherlands DTC.
  3. The Court of Appeal had four issues to consider;
* whether the Dutch SPV would be the beneficial owner of the interest payable by Indofood for the purposes of the relevant DTC
                * whether the Dutch SPV would be a resident of the Netherlands for the purpose of the relevant DTC
                * whether the obligation of Indofood to pay interest would, after the assignment to the Dutch SPV, be that originally owed to the Mauritian company, or a new obligation following novation, and
                * assuming that the answer to the first two questions was "yes" then whether it would be reasonable for the Dutch SPV to be interposed in the way suggested

It is the first of these questions on which this guidance focuses.

Beneficial ownership
  1. Like many other countries (including the UK), Indonesia reduces its withholding taxes on interest and royalties paid to non-residents where the recipient is entitled to claim that benefit under the terms of the relevant DTC. One of the most important conditions for relief is that the recipient must be the “beneficial owner” of the interest or royalty. The Court of Appeal quotes from OECD published reports and from the 1986 and 2003 Commentaries on the OECD Model Convention on Income and on Capital to explain how “beneficial ownership” is to be interpreted in the context of DTCs. These explanations were explicitly relied on by the Court of Appeal in its judgement in...

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