Indofood International Finance Ltd. v JPMorgan Chase Bank, N.A., London Branch

Whether contractual tax-related redemption conditions are satisfied is determined objectively. Where the condition requires that tax consequences cannot be avoided by reasonable measures, the court should apply a reasonable certainty test when forecasting the response of a foreign tax authority.

A restructuring through a foreign finance company may constitute a reasonable measure where the company would be resident there, would be the beneficial owner of the interest, and would not be merely a nominee or fiduciary. An assignment of an existing loan does not create a new loan for treaty purposes, and a special-relationship provision does not apply merely because the loan is assigned.

Indofood International Finance Ltd. v JPMorgan Chase Bank, N.A., London Branch concerned US$280 million loan notes issued by a Mauritian subsidiary and guaranteed by its Indonesian parent. Following termination of the Indonesia-Mauritius double taxation agreement, Indonesian withholding tax increased from 10 per cent to 20 per cent.

The issuer sought a declaration that it could redeem the notes under the tax-redemption provision. An earlier decision by Mr Justice Etherton held that the relevant condition was assessed objectively and that the issuer bore the burden of proof. The remaining issue was whether a proposed restructuring through a Netherlands company was a reasonable available measure capable of avoiding the increased tax.

1. Objective assessment and standard of certainty. The inability to avoid the additional tax obligation by reasonable measures was an objective question. In deciding whether the proposed restructuring would obtain treaty relief, the court applied a reasonable certainty test concerning the likely response of the Indonesian Tax Authorities and, ultimately, the Indonesian Tax Court.
2. Residence and beneficial ownership. The proposed Netherlands company would be resident in the Netherlands for tax purposes. It would also be the beneficial owner of interest paid under the assigned loan. Beneficial ownership was not defeated merely because the arrangement was treaty shopping. The company would not be a nominee, agent, trustee or fiduciary, and in an insolvency its undistributed interest would be available to its creditors generally, including the issuer, pari passu.
3. Other treaty issues. The proposed restructuring would not require a permanent establishment in Indonesia. The special-relationship provision did not apply because the transaction involved an assignment of an existing loan negotiated at the then-market rate, rather than a new loan. The loan, having already run for more than three years, would qualify for the nil withholding-tax rate applicable to loans exceeding two years.
4. Reasonable cost. The relevant comparison was between the cost of the restructuring and the additional 10 per cent withholding tax payable for the remaining life of the notes. The restructuring and investigation costs were materially below the estimated tax burden and therefore satisfied the contractual standard of reasonableness.
5. Disposition. The issuer was not entitled to the relief claimed. The claim was dismissed.

The proceedings were commenced under Part 8. The judgment records an earlier determination by Mr Justice Etherton on the objective construction of the redemption condition and the burden of proof. The present judgment determined the remaining factual and evidential issues.