The possible solutions

Author: | Published: 1 Dec 2009

New tax regulations published on November 5 2009 call into question the typical structures used for Indonesian bonds.

The new regulations address an area which has been uncertain for some time: the availability of treaty benefits for special purpose vehicles (SPVs) set up for financing purposes. Under the usual structure, an Indonesian corporate sets up an SPV in a jurisdiction with a favourable tax treaty. The SPV issues the bond and lends the proceeds to the Indonesian company. The intent was to reduce Indonesian withholding tax on interest payments from the default rate of 20%, to the rate under the tax treaty with the SPV.

This structure was used successfully for many years to reduce the withholding tax rate on Indonesian bonds to 10% – the best rate generally available. However, in 2004 a new tax treaty with Netherlands came into effect, which provided for a 0% withholding rate on...