Case No: A3/2005/2497
Neutral Citation Number: [2006] EWCA Civ 158
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
THE HON. MR JUSTICE EVANS-LOMBE
HC05C00335
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Thursday, 2nd March 2006

Before :

THE CHANCELLOR OF THE HIGH COURT
LORD JUSTICE CHADWICK
and
SIR PETER GIBSON
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Between :

	INDOFOOD INTERNATIONAL FINANCE LTD.	Claimant/
Appellant	
	- and -		
	JPMORGAN CHASE BANK N.A., LONDON BRANCH (FORMERLY J P MORGAN CHASE BANK, LONDON BRANCH)	
Defendant/Respondent	

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(Transcript of the Handed Down Judgment of
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
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The Hon. Michael Beloff QC and Mr James Eadie (instructed by Stephenson Harwood) for the Claimant/Appellant
Mr Richard Sheldon QC and Mr David Alexander (instructed by Clifford Chance LLP) for the Defendant/Respondent
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Judgment
The Chancellor : 

Introduction

1.	PT Indofood Sukses Makmur TBK (“the Parent Guarantor”) is a company incorporated in the Republic of Indonesia.  It carries on a substantial business in the production and distribution of food.  In 2002 it wished to raise capital by the issue of loan notes on the international market.  Had it done so itself it would have been obliged under Indonesian law to deduct 20% of the interest payable to the noteholders and pay it to the Indonesian Revenue on account of the noteholders’ liability for Indonesian tax in respect of their entitlement to interest arising in Indonesia.  This liability (“withholding tax”) could be reduced to 10% if the issue of the loan notes was made by a wholly owned subsidiary incorporated in the Republic of Mauritius and the capital so raised was lent on to the Parent Guarantor on terms which complied with the conditions specified in the Indonesian/Mauritius Double Tax Agreement (“the Mauritian DTA”).  Accordingly the Parent Guarantor procured the incorporation in Mauritius of the claimant Indofood International Finance Ltd (“the Issuer”).    On 18th June 2002 the Issuer issued US$280m 10.375% loan notes.   On the same day, the Issuer lent the capital so raised to the Parent Guarantor on substantially the same terms.   The issue, servicing and redemption of the loan notes and the loan to the Parent Guarantor were regulated by the conditions indorsed on the loan notes (“the Note Conditions”), a Trust Deed dated 18th June 2002 (“the Trust Deed”) under which the defendant JPMorgan Chase Bank N.A. (“the Trustee”) was appointed trustee for the noteholders, a Paying Agency Agreement (“the Agency Agreement”) whereby the Trustee was also appointed as the Principal Paying Agent and a Credit Agreement (“the Loan Agreement”) containing the terms of the loan made by the Issuer to the Parent Guarantor.   I shall refer to each of those documents in more detail later.
2.	The Note Conditions provided that the notes would be redeemed at par on 18th June 2007 but might be redeemed earlier if there were a change in the law of Indonesia whereby the obligation of the Parent Guarantor to deduct withholding tax from the interest payable to the Issuer under the Loan Agreement exceeded the rate of 10% for which the Mauritian DTA provided.   In that event, subject to conditions not material to this appeal, the Issuer might redeem the loan notes earlier if, but only if,
“...such obligation cannot be avoided by the issuer....taking reasonable measures available to it...”
3.	On 24th June 2004 the Republic of Indonesia gave notice to determine the Mauritian DTA with effect from 1st January 2005.   One consequence would be that thenceforth, the obligation of the Parent Guarantor to deduct withholding tax from the interest payments it was liable to make to the Issuer would be increased to 20%.   Moreover, by then both interest and exchange rates had moved against the Parent Guarantor to such an extent that it was in the commercial interests of the Parent Guarantor, but not of the noteholders, that the loan notes should be redeemed as soon as possible.
4.	On 20th August 2004, the Issuer gave notice to the Trustee of its intention to redeem the loan notes.  It certified that there was no reasonable measure that the Parent Guarantor could take to avoid the liability to deduct withholding tax at the higher rate of 20%.     On 18th November 2004, the Issuer sent a draft redemption notice to the Trustee seeking its approval to the redemption of the loan notes on 29th December 2004.   On 22nd November 2004, the Trustee refused to give its approval on the ground that the Issuer was not entitled to redeem the loan notes because the Trustee was not satisfied that there were no reasonable measures available whereby to avoid the increased liability for withholding tax.	On 15th February 2005 the Issuer issued a Part 8 claim seeking the determination of the court on questions designed to ascertain if it was then entitled to redeem the loan notes.  The claim came before Etherton J.  In his judgment given on 14th April 2005 he decided that the test whether there were reasonable measures available to the Parent Guarantor to avoid the additional liability to Indonesian withholding tax was an objective one.  In addition, he ruled that the onus was on the Issuer to establish the unavailability of such measures.  As the establishment of such unavailability involved issues of fact, he gave directions for further evidence and adjourned the trial.  Neither party appealed from the order of Etherton J.
5.	The adjourned hearing commenced before Evans-Lombe J on 22nd July 2005.   By then, the reasonable measures alleged by the Trustee to be available to the Issuer and the Parent Guarantor were limited to the migration of the Issuer to, or the substitution for the Issuer, or interposition between the Parent Guarantor and the Issuer, of a company incorporated in the Netherlands, Luxembourg or the United Kingdom.   At the hearing it was accepted that the only ‘measure’ to be considered was the interposition of a company incorporated in the Netherlands (“Newco”) between the Issuer and the Parent Guarantor.  It was suggested by the Trustee that such interposition could be effected by an assignment by the Issuer to Newco of the benefit of the loan agreement between the Issuer and the Parent Guarantor.   The consequence, as alleged by the Trustee, would be that under the Double Tax Agreement between the Republic of Indonesia and the Kingdom of the Netherlands (“the Dutch DTA”) the withholding tax payable by the Parent Guarantor in respect of its obligation to pay interest to Newco would be 10% or less.
6.	Thus, in principle, the issues before Evans-Lombe J fell into two categories, namely (1) could the interposition of Newco between the Parent Guarantor and the Issuer reduce the rate of withholding tax in respect of the interest payable by the former under the Loan Agreement to 10% or less?  And if so (2) was it reasonable for the Issuer/Parent Guarantor to adopt that measure?   In the first category there were issues as to the interpretation and application of the Dutch DTA by the courts in Indonesia in relation to (a) whether Newco would be the beneficial owner of the interest payable by the Parent Guarantor, (b) whether Newco would be resident in Holland and (c) whether the interposition of Newco could be achieved without the creation of a new loan by the novation of the Loan Agreement.  In the second category there were issues, primarily as to comparative cost, whether even if such a measure was available, it would be reasonable for the Issuer/Parent Guarantor to take it.
7.	Both parties adduced a substantial body of expert evidence as to the operation of the Dutch DTA in Holland and Indonesia and the law of those two countries on which there was much cross-examination.  The hearing before Evans-Lombe J concluded on 29th July 2005.   He communicated his decision to the parties on 2nd August, released his judgment in draft on 5th September and formally handed it down on 7th October.  In his judgment Evans-Lombe J elided the two categories of issue to which I have referred and applied a test of ‘reasonable certainty’.  By that test he concluded each of the issues in both categories in favour of the Trustee.   The Issuer appeals, with the permission of the judge, from his decision on all those issues and the Trustee, with the like permission, appeals from his decision to apply a test of reasonable certainty.   Thus the issues for our determination are:
(1) whether the judge was right to apply a test of ‘reasonable certainty’;

(2) whether, by the appropriate test, for the purposes of the Dutch DTA,

(a) Newco would be the beneficial owner of the interest payable by the Parent Guarantor,

(b) Newco would be resident in Holland,

(c) the obligation of the Parent Guarantor to pay interest would, after the assignment to Newco, be that originally owed by the Parent Guarantor to the Issuer under the Loan Agreement;

(3) whether, assuming an answer to each of the issues summarised in paragraph (2) to be in favour of the Trustee, it would be reasonable for the Issuer/Parent Guarantor to interpose Newco.
I will consider each of those issues in due course, but first it is necessary to set out the facts in a good deal more detail.
The Facts
8.	The Mauritian DTA was made in December 1996.  It was in substantially the same form as the later Dutch DTA but there were two material differences.  The first related to the definition of a “resident” contained in Article 4.  It did not include the provision later found in Article 4.4 of the Dutch DTA relating to the place of effective management of a body corporate.  The other material difference is that it did not include any provision comparable to Article 11.4 of the Dutch DTA whereby the rate of withholding tax might be reduced to nil.   (See paragraph 14 below)   The essential common feature of both is contained in Article 11.2 of the Mauritian DTA.  That provides that interest may be taxable in the contracting state in which it arises
“...but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10% of the gross amount of the interest.”
The issue of the loan notes was designed to obtain, if possible, the benefit of that provision.
9.	The loan notes were issued following an Offering Circular dated 11th June 2002.   As I have indicated in paragraph 1 above, it involved four material documents.  The first is the loan note itself on which the Note Conditions were inscribed.   They prescribed that the issue was of US$280m 10.375% Guaranteed Notes due 2007 subject to and with the benefit of the Trust Deed.  Condition 2 described the status of the loan notes as direct, general and unconditional obligations of the Issuer unconditionally and irrevocably and jointly and severally guaranteed by the Parent Guarantor and four named subsidiaries of the Parent Guarantor.   Condition 3 contained a number of restrictive covenants whereby the Parent Guarantor undertook that neither it nor any subsidiary company would engage in certain specified activities which might dilute its assets.  For present purposes it is sufficient to refer to the headings which, broadly described their effects as “negative pledge”, “limitation of incurrence of indebtedness”, “fixed assets disposal”, “consolidation, mergers and sales of assets”, “acquisitions”, “dividends by Parent Guarantor”, “limitation on restrictions on dividends by Group Subsidiaries”, “restriction of group subsidiary indebtedness”, “limitation on Issuer’s conduct of business” and “sale of subsidiary guarantor”.  Condition 5 provided for the loan notes to bear interest payable semi-annually in arrear on 18th June and 18th December in each year.  Such interest was to be paid, as prescribed by condition 7(b), by the paying agents in New York.  Condition 6 contained the provisions for redemption to which I have already made sufficient reference in paragraph 2 above.
10.	The Trust Deed, also made on 18th June 2002, provided for the appointment of the Trustee.  By clause 2.1 the Issuer covenanted with the Trustee to pay the amounts due on the loan notes in accordance with the Loan Conditions.  By clause 4 the Parent Guarantor and four named subsidiaries guaranteed to the Trustee payment of all sums due under the Note Conditions or the Trust Deed.  By clause 5 the Issuer and each of the Guarantors covenanted with the Trustee to comply with the provisions of the Trust Deed and the Note Conditions.  Clause 6 contained additional covenants by the Issuer and the Guarantors with the Trustee.  Clause 7 provided for the Trustee to agree to modifications of certain conditions of the Trust Deed, including the substitution of the Issuer.
11.	The Paying Agency Agreement appointed the Trustee as the Principal Paying Agent for the Issuer, each of the Guarantors and, on the occurrence of an event of default or potential event of default, for the Trustee.  Clause 7.1 provided that the Issuer “(failing which, the Guarantors)” would pay to the Principal Paying Agent, at an account of its nomination, one business day before the due date an amount equal to the interest falling due on the loan notes.  By clauses 7.4 and 8.3.2 the Principal Paying Agent was required to apply the amount it had received under clause 7.1 in paying the amount due to the noteholders.
12.	The Loan Agreement recited that the Issuer was a wholly owned subsidiary of the Parent Guarantor and had been “established as a special vehicle company to raise funds” on the international market.  By clauses 1, 3, 4 and 5 the Issuer extended the credit, defined as the proceeds of the loan notes, to the Parent Guarantor for five years expiring on 18th June 2007 at the same rate of interest, namely 10.375%, but net of any withholding tax due by the Parent Guarantor.  Clause 5A required all payments of principal and interest to be made in US dollars not later than two business days before the due date to the account nominated by the Issuer.  By clause 5D the Parent Guarantor might set off any amount paid by it to a noteholder as guarantor against any amount due under the Loan Agreement to the Issuer.
13.	The Note Conditions, the Trust Deed and the Paying Agency Agreement were each to be construed in accordance with English law, but the Loan Agreement was to be construed in accordance with the law of Indonesia.   The structure was clear; two business days before the due date the Parent Guarantor was obliged to pay the sums due by it under the Loan Agreement to the account nominated by the Issuer;  one business day before the due date the Issuer was obliged to pay the amount due to the noteholders to the Principal Paying Agent;  on the due date the Principal Paying Agent was obliged to pay the noteholders.  It was agreed on the hearing of the appeal that what had happened in fact was that the Parent Guarantor paid the sums due to the noteholders direct to the Trustee as Principal Paying Agent.
14.	On 1st January 2004 the Dutch DTA, concluded in January 2002, came into force.  It is described as “For the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income”.  It applies to persons who are residents of one or both of the two states in respect of all taxes on income imposed by either of them.  The relevant provisions are Articles 4.1, 4.4, 11.1, 11.2, 11.4 and 11.9.  They are in the following terms:
“Article 4 
Fiscal Domicile
1.		For the purposes of this Agreement, the term “resident of one of the two States” means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or other criterion of a similar nature.
[2.
3.]
4.		Where by reason of the provisions of paragraph 1 a person other than an individual ........is a resident of both States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.  If the competent authorities of the two States consider that a place of effective management is present in both States, they shall settle the question by mutual agreement.”
.....
“Article 11 
Interest
1. 		Interest arising in one of the two States and paid to a resident of the other State may be taxed in that other State.

2.		However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.
[3....]
4. 		Notwithstanding the provision of paragraph 2, interest arising in one of the two States shall be taxable only in the other State if the beneficial owner of the interest is a resident of the other State and if the interest is paid on a loan made for a period of more than 2 years or.....
5.		The competent authorities of the two States shall by mutual agreement settle the mode of application of paragraphs 2, 3 and 4.
[6...
7...	
8...]
9.		Where, owing to a special relationship between the payer and the recipient or between both of them and some other person, the amount of the interest paid, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each State, due regard being had to the other provisions of this Agreement.”
Articles 4.4 and 11.4 were not to be found in the Mauritian DTA.
15.	As I have mentioned, on 24th May 2004, the Republic of Indonesia terminated the Mauritian DTA with effect from 1st January 2005.  It issued a lengthy statement explaining the problems to which the Mauritian DTA had given rise.   In essence, they arose from the decision of the Government of Mauritius in 2001 to allow non-residents in Mauritius to use the Companies Act to set up various business agencies including special purpose vehicles and thereby enabled
“non resident parties in Mauritius to commit treaty shopping and treaty tax abuse by exploiting the Double Tax Avoidance Agreement for tax evasion in the country where tax rate is higher (in Indonesia)”
Without the benefit of Article 11.2 of the Mauritian DTA the rate of withholding tax for which the Parent Guarantor was liable in respect of the interest payable to the Issuer under the Loan Agreement would go up to the standard rate of 20% from 1st January 2005.
16.	It was in those circumstances that between August and November 2004 the Issuer sought to redeem the loan notes but failed to satisfy the Trustee that there were no reasonable measures available to the Issuer to avoid the obligation to pay withholding tax at more than 10%, being the proviso to its right to redeem conferred by condition 6(b) of the Note Conditions.  Accordingly these proceedings were commenced on 15th February 2005.  Following the decision of Etherton J on 14th April 2005 both parties were engaged in obtaining, inter alia, expert evidence as to the laws of the Netherlands and of Indonesia and the views of the Director General of Taxes in Indonesia (“DGT”) as to the application of the Dutch DTA.
17.	On 10th June 2005 the Parent Guarantor wrote to DGT seeking “guidance and confirmation of a special relationship transaction”.   One of the transactions on which such advice was sought was the interposition of a Dutch registered company between the Parent Guarantor and the Issuer on the basis that the Issuer would assign the benefit of the Loan Agreement to Newco and Newco would enter into a new agreement with the Issuer.  The letter then referred, inter alia, to Articles 11.2 and 11.4 of the Dutch DTA.  The position taken by the Trustee was described.  The Parent Guarantor then asked whether, if Newco was a company incorporated in the Netherlands and it was interposed as described, the Issuer would be allowed the reduction of withholding tax to 10% for which Article 11.2 provided, in particular on the interpretation of “beneficial ownership” and whether Newco would be regarded as the beneficial owner of the interest payable by the Parent Guarantor.  In addition the Parent Guarantor asked if, following the assignment of the loan by the Issuer to Newco, it would be regarded as having a term of more than two years for the purpose of Article 11.4.
18.	The reply of DGT is dated 24th June 2005.  The following are the relevant passages:
“3. 	Based on the facts, circumstances and regulations described above, the following are some guidance and confirmation on the matters in question:
a.	In accordance with its original title of the tax treaty that is “Agreement (Convention) between the Government of the Republic of Indonesia and the Government of ... for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income”, and the OECD and UN Commentary on Model Tax Convention, one of the underlying objectives of the establishment of the tax treaty is for the avoidance of double taxation and for the prevention of tax avoidance and evasion in respect to taxes on income.
b.	 Treaty Shopping is an abuse/improper use of the tax treaty as they are contrary to the objectives of the establishment of the treaty itself. Treaty shopping may occur where taxpayers who are not residents of Contracting States seek to obtain the benefits of a tax treaty by organizing a corporation or other legal entity in one of the Contracting States to serve as a conduit for income earned in the other Contracting State.
c.	 Therefore, any types of financing structures which will be adopted by [the Parent Guarantor] and [the Issuer] that is contrary to the objectives of the tax treaty will not be eligible under the Indonesian tax laws. On the facts and circumstances as stated in your letter, as the main purpose of the new financing structure to be adopted by [the Parent Guarantor] and [the Issuer] is clearly to avoid the increased withholding tax as a result of the termination of the Indonesia-Mauritius Tax Treaty and to take advantage of the provisions of the tax treaty of another country, accession to treaty benefits will be denied.
d.	 In accordance with the principle of Indonesian Income Tax Law which is “substance over form”, and also in accordance with OECD and UN Commentary on Model Tax Convention, the term beneficial owner which has been set as one eligibility requirements for the application of withholding tax rate on interest specified in the treaty is an anti abusive rule intended to limit the accession to the benefits provided by the treaty to only those who have the actual rights for such entitlement. Therefore, the term “beneficial owner” means the actual owner of the interest income who truly has the full right to enjoy directly the benefits of that interest income. Consequently, conduit company and nominee such as the NewCo will not be regarded as the actual owner of the income. Thus, the rate that shall be applied is in accordance with the Indonesian Income Tax Law which is 20%.....
[e
f]
g.	The NewCo will be regarded as a resident of Indonesia if the composition of the board of directors and management; of the NewCo meets the criteria set by the provision of Article 4 of the Tax Treaty between Indonesia and the Netherlands....
h.	If “interposition” scheme is to be adopted and established in the Netherlands, the provision of paragraph 4 of Article 11 of the Tax Treaty between Indonesia and the Netherlands cannot be applied since the mode of application between competent authority of Indonesia and the Netherlands has not been settled by mutual agreement.
[i]”
19.	By a circular letter dated 7th July 2005 issued by DGT to all tax offices in Indonesia and headed
“Regarding implementing criteria of beneficial owner as stated in the avoidance of Double Tax Treaty Agreement between Indonesia and other Countries”
the recipients were advised that
“The Directorate General of Taxation considers it is necessary to give explanation to give legal certainty regarding the definition on criteria of beneficial owner, as the following:-
a. “Beneficial owner” refers to the actual owner of income such as Dividend, Interest, and or Royalty either individual taxpayer or business entity taxpayer that has the full privilege to directly benefit from the income.
b. Herewith, “Special purpose vehicle” in form of  “conduit company”, “paper box company”, “pass-through company” and other similar are not included in “beneficial owner” definition as above.
c. If any other party that is not a “beneficial owner” as defined in a. and b. above receives payment of Dividend, Interest, and or Royalty originating from Indonesia, the party that paid for the Dividend, Interest and or Royalty is obligated to withhold income Tax Article 26 according to Indonesia Income Tax Law with 20% (twenty percent) tariff from the gross amount paid.”
20.	Given that until a late stage of the proceedings before Evans-Lombe J there was a range of “reasonable measures” allegedly available to the Issuer/Parent Guarantor it is not surprising, though no less regrettable, that the scheme for the interposition of Newco incorporated in the Netherlands ultimately relied on was never very clearly defined.  The structure suggested was that proposed by the expert in Dutch law for the Issuer/Parent Guarantor, Mr van Casteren of Loyens & Loeff.   In his report he described such structure, of which he had practical experience, in the following terms:
“If interposition were to be used, the Issuer would assign its receivable under the loan to DutchCo against a receivable on DutchCo (i.e. the issuer would assign its rights under the loan with the Indonesian guarantor to DutchCo in return for DutchCo entering into a separate loan agreement with the issuer)”
He also explained that DutchCo or Newco would have to comply with the ‘substance and risk’ requirement imposed by Dutch law.  As a finance company it would be obliged to maintain an equity of the lesser of 1% of its loans or €2m.
21.	In the light of the evidence before him Evans-Lombe J described the proposed restructuring in paragraphs 20 to 22 in his judgment in the following terms:
“20.	It is proposed that Newco will be incorporated in Holland, will keep all its records, whether of trading, incorporation, shareholding, or otherwise, in Holland.  It will be accounted for, including for all tax purposes, in Holland by Netherlands auditors.  It will comply in all respects with Netherlands registration requirements.  It will have no fixed place of business in Indonesia.  All of its directors will be resident in Holland even if their nationality is Indonesian.  
21.	It was explained to me that, for a finance company of this kind to be accepted by the Netherlands Revenue Authorities as being resident for tax purposes in the Netherlands, it was necessary to comply with those Authorities’ “substance and risk” requirements.  These requirements prescribed that the relevant company must be fully capitalised up to a defined level and that, where the purpose of the company was the provision of loan facilities that those facilities must be made available on the basis of a transaction yielding a profit to the lending company and thus to be lent at a rate of interest greater than that at which the proceeds of the interest payments are accounted for to the providers of the finance from which the loan is made, here the Noteholders via the Issuer.  The minimum resulting “spread” is fixed by the Netherlands Revenue Authorities.   Newco would comply in all respects with these requirements.  
22.	Having incorporated Newco in the Netherlands in this way it is proposed that the benefit of the loan agreement between the Issuer as lender and the Parent Guarantor as borrower would be assigned by the Issuer to Newco and so the Parent Guarantor would be paying interest on that loan to Newco a company resident in the Netherlands which would then pay to the Issuer an amount sufficient to ensure that the Issuer would be enabled to pay the Noteholders’ interest at the rate due under the Notes.  I will hereafter refer to the proposals set out in the previous four paragraphs as “the Proposed Restructuring”.”
22.	It is apparent that the judge’s description of an assignment in paragraph 22 is inconsistent with the provision of the spread referred to in paragraph 21 because the latter would require some form of novation to increase the rate of interest payable by the Parent Guarantor.  It was explained to us by counsel for the Trustee, without objection from counsel for the Issuer, that it was not intended to provide such an interest spread anyway.  Rather the ‘substance and risk’ requirement of Dutch law would be satisfied by providing Newco with a combination of ‘handling charges’ and paid up equity capital.   To this extent, therefore, the intended structure for the interposition of Newco is different from that considered by the judge.
23.	It is unnecessary to refer further to the requirements of Dutch law.  With regard to the law of Indonesia the Trustee relied on the reports of various experts, primarily Mr Sikuan Sutanto, a retired senior official of the Indonesian Tax Authority.  The Issuer relied on the expert evidence of Professor Mansury, Professor of International Taxation at the University of Indonesia.  Each of them was extensively cross-examined.  The judge did not express any view as to which of them was the more reliable but counsel for the Issuer accepted that it was clear that Evans-Lombe J, without actually saying so, preferred the evidence of Mr Sutanto, and with good reason.
24.	Nevertheless, a number of matters were common ground between the experts.  First, the proper interpretation and application of the Dutch DTA in Indonesia is a matter for the courts of Indonesia.  Second, the Dutch DTA must be interpreted in accordance with the ordinary meaning to be given to its terms in their context and in the light of its purpose and object, as required by Article 31 of the Vienna Convention on the Law of Treaties 1969, and having regard to substance over form, as required by the law of Indonesia.   Third, on matters of such interpretation the Indonesian courts would have regard to the official commentary on the OECD model Double Tax Agreement on which the Dutch DTA is, and previously the Mauritian DTA was, based, academic commentaries on the OECD model such as the writings of Professor Philip Baker QC and relevant circulars issued by DGT such as that dated 7th July 2005 to which I have referred in paragraph 19 above.   Fourth, the law of Indonesia is based on the civil law.  There is no doctrine of stare decisis and in any event there is no decision of the Indonesian courts on any of the points on the Dutch DTA which arise in this case.  Fifth, the DGT has up to 10 years in which to reopen questions relating to liability to tax.  Sixth, there is no free-standing principle of Indonesian law which requires an advantage apparently obtained under a tax avoidance scheme to be denied to a participant in that scheme, though the existence of a tax avoidance scheme may be relevant to questions of legislative interpretation.
The judgment of Evans-Lombe J
25.	In paragraphs 1 to 23 the judge described the background and the issues he had to determine.  In paragraph 24 he noted that such determination required him to form a view as to how the Indonesian Tax Authorities and the Indonesian Tax Court “would react to the proposed restructuring if it is put into effect”.  He then described the argument of counsel for the Issuer that the proper application of the proviso to Note Condition 6(b) (see paragraph 2 above) required him to adopt a test of reasonable certainty as opposed to the balance of probability.  He rejected the argument of counsel for the Trustee that the use of the word “cannot” in that proviso showed that ‘reasonable certainty’ could not be the test.   In paragraph 29 Evans-Lombe concluded:
“it seems to me that this court should apply a “reasonable certainty” test in coming to any conclusion as to the likely reaction of the Indonesian Tax Authorities to the putting into effect of the Proposed Restructuring.” 
26.	By its respondent’s notice the Trustee contends that the judge was wrong to have adopted that test.  It submits that the judge should have held that the burden was on the Issuer to establish on a balance of probabilities that there were no reasonable measures available to the Issuer or the Parent Guarantor to avoid the obligation to pay withholding tax at a rate in excess of 10%.  Though raised by the respondent Trustee the resolution of this issue is crucial to all the other issues raised by the Issuer.  Accordingly I deal with it first.
27.	In his oral argument counsel for the Issuer conceded that the standard of proof must be the usual civil standard of balance of probability.  Accordingly, as counsel for the Trustee contended, the question of whether there are any “measures available to” the Issuer or the Parent Guarantor by which the obligation to pay withholding tax at a rate in excess of 10% could be avoided must be determined first and on a balance of probability.  If it is established that such a measure does exist then the question will arise whether it is in all the circumstances reasonable to require the Issuer and Parent Guarantor to take that measure.  This requires an assessment of all the risks both legal and commercial of adopting that measure.   This is not the same test as that of reasonable certainty adopted by the judge but I doubt that the distinction is likely to lead to any practical difference.
28.	In my view the judge conflated the two categories to which I referred in paragraph 6 above.  Had he regarded them separately, as I think he should have done, then I have no doubt he would have recognised that the civil standard of proof applied to the first category and questions of uncertainty and risk came within the second.  In this event he would also have recognised that the issue of reasonableness was not limited to a cost/benefit comparison of adopting the available measure.
29.	At this stage I should also note another criticism of the judge’s general approach to the issues before him made by counsel for the Issuer.  It is accepted that in paragraph 24 of his judgment, to the material part of which I have referred in paragraph 25 above, the judge correctly directed himself that he must ascertain the likely decision of the Indonesian Tax Court.   But, counsel contended, when it came to it the judge merely determined how he, as a judge of the High Court in England, would decide the same issue.  So, it is said, the judge substituted his own view for that of the Indonesian Tax Court as demonstrated by the expert evidence before him.
30.	Counsel for the Issuer relied on particular passages in the judge’s judgment as demonstrating the errors for which he contended.   Thus, in paragraph 49 the judge tested the question of Newco’s beneficial ownership by reference to the rights of creditors in the event of its insolvency.  In paragraph 35 he considered whether Newco might be held to be resident in Indonesia by reference to concepts of English Company law as to the relationship between a parent company and its subsidiary.
31.	For my part I do not think this criticism can be dealt with in isolation from the particular issues on the Dutch DTA which arose.  If the judge’s conclusion on those issues is supported by the evidence of Indonesian law it matters not that he may have described them in terms more appropriate to English law.  If, by contrast, they are not then his decision cannot stand for that reason irrespective of whether English law is to the same effect as Indonesian law.   In any event I think that the criticism is unfounded because both the position in the insolvency of Newco and the relationship between a parent company and its wholly owned subsidiary were canvassed in the evidence.
32.	Accordingly, having disposed of the general criticisms directed to the judge’s judgment it is necessary to consider the specific issues arising on the interpretation and application of the Dutch DTA.  They are 
(a) whether Newco would be the beneficial owner of the interest payable by the Parent Guarantor, 
(b) whether Newco would be resident in Holland, and 
(c) whether the interposition of Newco could be achieved without the creation of a new loan from Newo to the Parent Guarantor.
Each issue must be considered from the perspective of whether the interposition of Newco could comply with the relevant requirement.  If it could not then that is an end of the matter; if it could but might not then the element of risk must be put in the scales of reasonableness.  
Beneficial Ownership
33.	The requirement that Newco should be “the beneficial owner” of the interest paid or payable by the Parent Guarantor would be as essential a condition to the application of Articles 11.2 and 11.4. in the future as it was under the Mauritian DTA in the case of the Issuer in the past.   
34.	The meaning of the phrase has been considered in a number of the aids to interpretation I have referred to in paragraph 24 above.   Thus Professor Philip Baker QC referred to it in paragraph 10B-09 of his commentary on the OECD Model Convention in these terms:
“The requirement that the recipient of the dividends be the “beneficial owner” (the French version of the Model uses: bénéficiaire effectif - both language versions of the Model are equally authoritative) was added when the text of the Model was revised in 1977, and was added to prevent abuse in the form of treaty-shopping.  Unfortunately, the meaning of the phrase still remains less than fully clear.”
35.	In 1986 the OECD published a report entitled “Double Tax Convention and the Use of Conduit Companies” (“the Conduit Companies Report”).  In paragraph 14(b) it was stated that:
“Articles 10 to 12 of the OECD Model deny the limitation of tax in the State of source on dividends, interest and royalties if the conduit company is not its “beneficial owner”. Thus the limitation is not available when, economically, it would benefit a person not entitled to it who interposed the conduit company as an intermediary between himself and the payer of the income (paragraphs 12, 8 and 4 of the Commentary to Articles 10, 11 and 12 respectively). The Commentaries mention the case of a nominee or agent. The provisions would, however, apply also to other cases where a person enters into contracts or takes over obligations under which he has a similar function to those of a nominee or an agent. Thus a conduit company can normally not be regarded as the beneficial owner if, though the formal owner of certain assets, it has very narrow powers which render it a mere fiduciary or an administrator acting on account of the interested parties (most likely the shareholders of the conduit company). In practice, however, it will usually be difficult for the country of source to show that the conduit company is not the beneficial owner. The fact that its main function is to hold assets or rights is not itself sufficient to categorise it as a mere intermediary, although this may indicate that further examination is necessary. This examination will in any case be highly burdensome for the country of source and not even the country of residence of the conduit company may have the necessary information regarding the shareholders of the conduit company, the company's relationships to the shareholders or other interested parties or the decision-making process of the conduit company. So even an exchange of information between the country of source and the country of the conduit company may not solve the problem. It is apparently in view of these difficulties that the Commentaries on the 1977 OECD Model mentioned the possibility of defining more specifically during bilateral negotiations the treatment that should be applicable to such companies (cf. paragraph 22 of the Commentary on Article 10).”
36.	In 2003 the Commentary on the OECD Convention was amended to include the following:
“Where an item of income is received by a resident of a Contracting State acting in the capacity of agent or nominee it would be inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption merely on account of the status of the immediate recipient of the income as a resident of the other Contracting State.  The immediate recipient of the income in this situation qualifies as a resident but no potential double taxation arises as a consequence of that status since the recipient is not treated as the owner of the income for tax purposes in the State of residence.  It would be equally inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption where a resident of a Contracting State, otherwise than through an agency or nominee relationship, simply acts as a conduit for another person who in fact receives the benefit of the income concerned.  For these reasons, the [Conduit Companies Report] concludes that a conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties.”
37.	This led Professor Baker, in paragraph 10B-10.4 of his official commentary on the OECD Model Convention to state:
“The essence of this Commentary is to explain that the “beneficial ownership” limitation is intended to exclude:
(a) mere nominees or agents, who are not treated as owners of the income in their country of residence;
(b)	any other conduit who though the formal owner of the income, has very narrow powers over the income which render the conduit a mere fiduciary or administrator of the income on behalf of the beneficial owner.
It is worth making the point that, as seems clear from this amended Commentary, the mere fact that the recipient may be viewed as a conduit does not mean that it is not the beneficial owner.”
Later, in paragraph 10B-14, he added in a reference to the OECD commentary:
“This suggests that the term should be accorded an “international fiscal meaning” not derived from the domestic laws of Contracting States.”
38.	In paragraph 10B-15 Professor Baker QC added:
“The practical question remains whether, for example, a company under the control of another - and therefore likely (though not legally obliged) to pay to its ultimate owner any sums received - could be regarded as beneficial owner of the dividends it receives. Or, to take another example, suppose that a member of a multinational group borrows money and then lends the money on to another group company: the two loans are not tied together, and the lending company is not obliged to use the interest it receives to pay interest on the loan it received - in practice, however, it is likely to do so. Adopting the approach of the OECD Commentary (paragraph 12, as amended in 2003), the issue is whether the recipient company is an agent, or a nominee, or a conduit which has, as a practical matter, very narrow powers over the income which render it a mere fiduciary or administrator. As a practical approach, one can ask whose income the dividends (interest/royalties) are in reality. One way to test this is to ask: what would happen if the recipient went bankrupt before paying over the income to the intended, ultimate recipient? If the ultimate recipient could claim the funds as its own, then the funds are properly regarded as already belonging to the ultimate recipient. If, however, the ultimate recipient would simply be one of the creditors of the actual recipient (if even that), then the funds properly belong to the actual recipient. It is worth remembering that there are many forms of treaty shopping, and not all states have a uniform view on what constitutes abuse of a tax treaty relationship. The beneficial ownership limitation is intended to counter one particularly abusive form of treaty shopping: by the use of agents, nominees or conduits who are mere fiduciaries. If Contracting states wish to provide more extensive anti-abuse provisions, they are at liberty to agree to put these in their treaties (and many do so, which is strong proof that the beneficial ownership limitation is of only limited scope).”

39.	Evans-Lombe J concluded in paragraph 46 that 
“Newco, just as the Issuer, will not be a nominee or agent for any other party and, not being any sort of trustee or fiduciary, will have power to dispose of the interest when received as it wishes, although it will be constrained by its contractual obligation to the Issuer to apply the proceeds of the interest payments in performance of those obligations.”
At paragraphs 49 and 50 he added:
“49.	It is clear to me that in the absence of any trust or fiduciary relationship between Newco and the Issuer, in an insolvency of Newco undistributed interest received from the Parent Guarantor would be an asset of Newco for distribution amongst its creditors generally, including the Issuer, pari passu.
50.	It seems to me that there can be no ambiguity in the application of the concept of beneficial ownership to the loan transaction as proposed to be restructured.  The beneficial owner of interest received under a loan transaction must be the lender.  As a result of the proposed assignment of the benefit of the loan agreement between the Issuer and the Parent Guarantor, by the Issuer to Newco, Newco will be the lender.  In no sense will Newco be acting as nominee or administrator for the Issuer or the Noteholders. It will merely be contractually bound to indemnify the Issuer against its obligations to those Noteholders.  The Noteholders will have no claim to be the beneficial owners of the interest.  They would be in no position to claim the interest from the Parent Guarantor and for that reason or otherwise to suggest that Newco will hold the interest when received on trust for them.  After restructuring there will have to be some entity that qualifies as beneficial owner of the interest.  It seems to me there will be only one candidate for that, namely, Newco. In fact if one is considering the “substance” of Newco as beneficial owner of the interest, its position is stronger than that of the Issuer, because, by contrast with the Issuer, it will be receiving interest from the Parent Guarantor at a greater rate than that for which it will be indemnifying the Issuer in making payments to the Noteholders.  It follows that if the Indonesian Tax Authorities were prepared to tolerate the current arrangements and confer the benefit of double taxation relief pursuant to the Indonesia/Mauritius DTA while it was in force, a fortiori they should be prepared to give that relief after the Proposed Restructuring has been put into force.”
40.	These passages have been criticised on a number of grounds.  First, nowhere in his judgment did the judge refer to the DGT circular issued on 7th July 2005 which I have quoted in paragraph 19 above.  Second, he did not give any detailed consideration to whether the Issuer had, for the purpose of the Mauritian DTA, been the beneficial owner of the loan interest payable by the Parent Guarantor.  Third, the judge was wrong in the penultimate sentence of the second passage I have quoted in paragraph 39 above.   Newco was not to receive interest at a higher rate than the Issuer had as compliance with the Dutch “substance and risk” principle was to be achieved by a combination of capital and handling charges.
41.	Counsel for the Trustee pointed out that in the court below the detail of the financing structure of the loan notes had not been examined, nor had it been contended that the Issuer had not been the beneficial owner of the interest it had received from the Parent Guarantor for the purposes of the Mauritian DTA.   He did not suggest that these points were not open to the Issuer in this court but he invited us to treat them with caution because they had not been subject to the scrutiny they deserved.   I accept the latter point and do approach this part of the case with caution.  Nevertheless I am satisfied that the Issuer was not and, if and when interposed, Newco could not be the beneficial owner of the interest receivable from the Parent Guarantor for the purposes of Article 11.2 of the Mauritian DTA or Article 11.2 of the Dutch DTA. 
42.	The fact that neither the Issuer nor Newco was or would be a trustee, agent or nominee for the noteholders or anyone else in relation to the interest receivable from the Parent Guarantor is by no means conclusive.   Nor is the absence of any entitlement of a noteholder to security over or right to call for the interest receivable from the Parent Guarantor.   The passages from the OECD commentary and Professor Baker’s observations thereon show that the term “beneficial owner” is to be given an international fiscal meaning not derived from the domestic laws of contracting states.   As shown by those commentaries and observations, the concept of beneficial ownership is incompatible with that of the formal owner who does not have “the full privilege to directly benefit from the income”.    I take this phrase from the circular letter from DGT dated 7th July 2005.  It is entirely consistent with the various commentaries I have quoted in paragraphs 35 to 38 above.
43.	The legal, commercial and practical structure behind the loan notes is inconsistent with the concept that the Issuer or, if interposed, Newco could enjoy any such privilege.   In accordance with the legal structure the Parent Guarantor is obliged to pay the interest two business days before the due date to the credit of an account nominated for the purpose by the Issuer.  The Issuer is obliged to pay the interest due to the noteholders one business day before the due date to the account specified by the Principal Paying Agent.  The Principal Paying Agent is bound to pay the noteholders on the due date.  It is hard to see how Newco could be interposed in that chain without some change to the Loan Agreement, but, be that as it may, the Issuer is bound to pay on to the Principal Paying Agent that which it received from the Parent Guarantor because it is precluded from finding the money from any other source by the Note Conditions, in particular conditions 3(i) and (j).   The provisions of condition 3(i) would apply directly to Newco and it is likely that as part of the interposition the Trustee would insist that the terms of condition 3(j) were extended to Newco too.  
44.	But the meaning to be given to the phrase “beneficial owner” is plainly not to be limited by so technical and legal an approach.  Regard is to be had to the substance of the matter.   In both commercial and practical terms the Issuer is, and Newco would be, bound to pay on to the Principal Paying Agent that which it receives from the Parent Guarantor.  This is recognised by what we were told actually happens now as recorded in paragraph 13 above.   The Parent Guarantor is bound to ensure that such an arrangement continues lest it is required to pay again under its guarantee to the noteholders contained in the Trust Deed.  In practical terms it is impossible to conceive of any circumstances in which either the Issuer or Newco could derive any ‘direct benefit’ from the interest payable by the Parent Guarantor except by funding its liability to the Principal Paying Agent or Issuer respectively.  Such an exception can hardly be described as the ‘full privilege’ needed to qualify as the beneficial owner, rather the position of the Issuer and Newco equates to that of an “administrator of the income”.
45.	Such a conclusion appears to me to be consistent with the evident purpose and object of the Mauritian DTA and the Dutch DTA.  Their primary purpose is apparent from their respective titles.  Accepting that the Dutch DTA also had as its object the encouragement of long term foreign loans, hence the inclusion of Article 11.4, none of such purposes is furthered by affording tax relief to the Parent Guarantor because it has a Mauritian or Dutch Subsidiary when such relief would not have been afforded to the Parent Guarantor had the loan been made direct to it.
46.	Finally I should mention the fact, to which Evans-Lombe J referred, that the Indonesian Tax Authorities did not challenge the entitlement of the Parent Guarantor to deduct withholding tax from the interest payable to the Issuer at the concessionary rate of 10%.   In my view this cannot affect the legal position in Indonesia as to whether the interposition measure is available at all.  It might affect the reasonableness of requiring the Issuer/Parent Guarantor to adopt the measure if available.  For my part I would not attribute weight to it in that context either.  It is apparent from the reasons given by the Indonesian authorities for the determination of the Mauritian DTA that they are increasingly aware of and concerned about what they conceive to be the misuse of the Double Tax Agreements.   I infer that they are likely to scrutinise arrangements such as this more closely in the future; and they will have ten years in which to do so.
47.	For all these reasons I conclude that the interposition of Newco is not a measure available to the Issuer or the Parent Guarantor whereby to avoid the obligation to pay withholding tax at a rate in excess of 10%.  It follows that the conditions for the application of both Article 11.2 and Article 11.4 are not satisfied.  In consequence the Issuer has, in my view, discharged the onus of establishing that there are no available measures for the purposes of Note Condition 6(b).  
48.	If, for any reason, I have overstated the certainty of my view I would conclude that it could not, in all the circumstances, be reasonable to require the Issuer and the Parent Guarantor to implement the interposition of Newco.   Not only does it appear to be extremely doubtful if Newco could, as a matter of Indonesian law, be regarded as the beneficial owner of the interest for the purposes of Articles 11.2 and 11.4 but paragraph 3(d) of the letter dated 24th June 2005 (see paragraph 18 above) from DGT shows that he would be likely to challenge any such claim.  Accordingly, at the least, the interposition of Newco would be likely to give rise to a dispute with DGT which could only be resolved by litigation which, in my view, the Parent Guarantor would be most unlikely to win.
49.	I have not overlooked the surprising fact that, as the cross-examination of Professor Mansury elicited, the views expressed in Paragraph 3(d) of the letter of 24th June 2005 were inspired by Professor Mansury’s participation in its drafting after his retention as an expert witness for the Issuer.  Nevertheless the judge accepted the letter as properly reflecting the views of DGT.  Given the coincidence of those views with the passages from the OECD Commentaries and Reports and Professor Baker’s observations, which I have quoted in paragraphs 34 to 38 above, I see no reason to doubt that the letter does represent the opinions of DGT.
50.	My conclusion on beneficial ownership, if shared by the other members of the court, is enough to warrant allowing this appeal.  But, for completeness, I should also consider the other essential condition for the application of Article 11.2, namely residence of Newco in Holland. 
Residence
51.	Assuming Newco to be the beneficial owner of the interest payable by the Parent Guarantor under the Loan Agreement, unless it is also regarded by the Indonesian Tax Authorities as resident in Holland the 10% rate of withholding tax for which Article 11.2 provides would not be available.   Such residence is also a condition for the nil rate of withholding tax payable under Article 11.4.  The test of residence is that set out in Article 4 of the Dutch DTA.
52.	I assume that Newco will be treated by the tax authorities in the Netherlands as a resident in Holland because it will have complied with all the necessary requirements of ‘substance and risk’ and the composition of its board of directors to which Evans-Lombe J referred in paragraphs 20 and 21 of his judgment quoted in paragraph 21 above.  But to be treated as resident in Holland and not in Indonesia by the Indonesian Tax authorities it would be essential that the place of Newco’s ‘effective management’ should be Holland, see Article 4.4.
53.	In paragraph 31 of his judgment Evans-Lombe J stated:
“I have come to the clear conclusion that in those circumstances Newco would indeed be treated as resident in the Netherlands for tax purposes both in the view of the Netherlands Tax Authorities and of the Indonesian Tax Authorities.”
His conclusion in relation to the views of the Netherlands Tax Authorities is not disputed, but his conclusion with regard to the Indonesian Tax Authorities is.
54.	At the trial Professor Mansury initially conceded that the Indonesian Tax Authorities would regard Newco as resident in the Netherlands, not in Indonesia.  His later attempt to withdraw that concession was rejected by the judge for the reasons given in paragraphs 31 to 35 of his judgment.   In paragraph 36 the judge accepted that in paragraph 3(g) of the letter from DGT dated 24th June 2005 (see paragraph 18 above) he appeared to be supporting the position of the Issuer but was unable to discern the basis for such support.
55.	The test of “place of effective management” contained in Article 4.4 of the Dutch DTA was considered in the OECD commentary on that Article in the OECD Model Convention.   In paragraph 24 it is stated that:
“The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made.  The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management.”
The validity of this test was accepted by Mr Sutanto.  Seemingly Professor Mansury belatedly sought to do so too but his attempt was rejected by the judge.
56.	Counsel for the Trustee relied on the facts that the composition of the board of Newco would be such as to demonstrate management in Holland and that the decisions that board would have to take would embrace the keeping of its books and their audit as well as what to do with the handling charges and equity capital with which Newco was to be provided.
57.	In my view that would not be enough.  As counsel for the Issuer pointed out the test, as elaborated by the OECD Commentary, refers to the place where “key” decisions are taken.  The provisions of the Trust Deed and, more particularly, of the Note Conditions show clearly that they must be taken by the Parent Guarantor.  Whilst I do not doubt that the board of directors of Newco would be permitted to determine what to do with the handling charges and equity capital and would be responsible for complying with the requirements of Dutch law, those are hardly the “key” decisions.   Let it be assumed that the Issuer and Newco are otherwise resident in Holland and the question arose whether to interpose Newco it is, in my view, plain beyond doubt that such a decision and the terms of any interposition would not be left to the Issuer or Newco but would be decided by the board of the Parent Guarantor.  In particular it would not be left to the board of the Issuer or of Newco to decide whether to assign or to accept the benefit of the Loan Agreement between the Parent Guarantor and the Issuer and if so on what terms.   Questions in relation to any subsequent migration, substitution or interposition of another company between the Parent Guarantor and Newco or between Newco and the Issuer would be decided by the board of the Parent Guarantor.   In my view it is plain that the place of effective management of the Issuer is Indonesia and that the place of effective management of Newco, if interposed between the Parent Guarantor and the Issuer, would be Indonesia too.
58.	In my view the interposition of Newco was not and is not a measure available to the Issuer/Parent Guarantor whereby to avoid the liability of the latter to pay withholding tax at the full rate of 20% because Newco would be resident in Indonesia for the purpose of the Dutch DTA.   If for any reason I am wrong to conclude that the measure is not available at all on the ground of residence, I should conclude that it is not a reasonable measure because of the very serious doubts that it could be found to be effective in Indonesian law.  Though the reasoning behind paragraph 3(g) of the letter from DGT dated 24th June 2005 is opaque it cannot be doubted that the Indonesian Tax Authorities would be likely to challenge any suggestion that Newco was not resident in Indonesia.
59.	For these reasons, in addition to those I have mentioned in relation to beneficial ownership, I conclude that the interposition of Newco is not a measure available to the Parent Guarantor or the Issuer and is not reasonable.   Accordingly I would allow the appeal. In these circumstances the remaining issues I have identified in paragraphs 7 and 32 above do not arise.  But, in case this matter goes further and for completeness I will shortly indicate my views.
Assignment or Novation
60.	The application of both Articles 11.4 and 11.9 depends, in addition to the two conditions of beneficial ownership and residence, on whether, following the interposition of Newco, the interest payable by the Parent Guarantor is payable in respect of the original loan or in respect of a new loan made at the time of interposition.  Plainly if it is a new loan redeemable on 18th June 2007 it was not “made for a period of more than 2 years” as required by Article 11.4.  Similarly because of the movement of interest and exchange rates since the original issue in June 2002, the interest payable by the Parent Guarantor could not be the market rate for a new loan made at the time of interposition for the purposes of Article 11.9.
61.	The Trustee and its Dutch law advisors contended that the interposition could be achieved by a simple assignment of the benefit of the loan agreement by the Issuer to Newco without any form of novation which could constitute the making of new loan.  This contention was upheld by the judge in paragraphs 54 and 55 of his judgment.  He concluded that the old loan continued, that loan was made for more than two years and the rate of interest when it was made in June 2002 was the market rate.
62.	These conclusions were challenged by the Issuer.  It  contended that the terms of the loan by the Issuer to the Parent Guarantor would have to be changed in relation to a number of matters.  First, as alleged in the written argument of counsel, the interest rate payable by the Parent Guarantor would have to be increased so as to allow for the spread it was thought that the Dutch principle of ‘substance and risk’ required.  Second, the provision contained in clause 4 of the Loan Agreement whereby the Issuer nominated the account to which the Parent Guarantor was to pay the interest on the loan would need to be changed to confer the power of nomination on Newco.  Third, the provision contained in clause 3(D) would have to be changed so that the right of set-off thereby conferred on the Parent Guarantor was exercisable against Newco rather than the Issuer.  Fourthly, the terms of clauses 7 and 8 would have to be altered to recognise that the lender was Newco and not the Issuer.
63.	I would reject the first reason.  As was made plain at the hearing before this court, the Dutch requirement of ‘substance and risk’ is not to be satisfied by an interest spread;  and the payment of handling charges and the provision of equity capital to Newco would have no necessary effect on the Loan Agreement at all.   I accept that the other changes would have to be made.  To that extent, the Loan Agreement would have to be amended but the effect would not, in my view, be to novate the loan from the Issuer to the Parent Guarantor.  I see no reason in English law, and we were not referred to any evidence of Indonesian law in this respect, which would necessitate treating the loan as having been repaid by the Parent Guarantor to the Issuer, followed by a loan of the repayment proceeds by the Issuer to Newco and a new loan by Newco to the Parent Guarantor.  And even if there was it is certainly not clear that the Indonesian Tax court would then consider the conditions for the application of Articles 11.4 and 11.9 not to have been satisfied. 
Reasonable Cost
64.	The final group of issues arises under the general issue of whether the measure, if available, was reasonable.  Before the judge this was treated as being an exercise in comparative cost.  For the reasons I have given I do not think it should be so limited, but even if so limited the judge’s conclusions were challenged by both the Issuer and the Trustee.
65.	The judge’s conclusions are contained in paragraphs 59 to 61 of his judgment.  He said:
“59.	I accept [counsel]’s submission that the appropriate comparator with which the likely cost of setting up the Proposed Restructuring and thereafter its running costs (which would take account of any resulting reduction in Indonesian withholding tax but also tax incurred in Holland by Newco), is to be compared, is the amount of the additional 10% withholding tax now being incurred as a result of the Indonesian Tax Authorities imposing on the Parent Guarantor a 20% rate, an additional 10%, for the remaining period of the loan. This has been calculated at $1.8M.
60.	If my conclusion on the application of article 11.4 is correct Indonesia will allow a nil rate of withholding tax or, if my conclusion on article 11.4 is rejected it will allow a rate limited to 10% which the Netherlands Tax Authorities would deduct from any Netherlands liability to tax of Newco.  It is the Issuer’s case that the cost of setting up the Proposed Restructuring, spread over the unexpired portion of the loan together with the running costs, will amount to approximately US$300,000.  I accept that there should be added to those costs, the costs incurred by the Issuer in investigating the availability of alternative countries DTAs with Indonesia but only up to November 2004 the date when the Trustee rejected the Issuer’s proposed notice to redeem.  Because of the Issuers obligation to indemnify the Trustee against all costs that figure must include the investigation costs of both parties.  The Issuer has estimated those costs at $490,000.
61.	On the basis that my conclusion as to the applicability of article 11.4 is correct there would be a saving of $1.8M in Indonesian withholding tax but a consequent increase in Netherlands tax on Newco reflecting the fact that Newco would not be able to set-off against its liability to Netherlands tax any Indonesian withholding tax.  As I understand Mr Elias’ evidence these will at worst simply cancel each other out.  In my judgment even taking the Issuer’s estimate of the costs at their face value, and they are not accepted by the Trustee, the costs do not exceed the standard of reasonableness contained in the Proviso.”
66.	The contentions of the Issuer are that the judge was wrong to limit the investigation costs to those incurred before November 2004 and not to allow anything for the costs of this litigation.   The Trustee claims that the judge overstated the costs of the restructuring.  In the oral argument of counsel for the Trustee it was also argued that the judge was wrong to have made any allowance for the costs of the investigation before November 2004.
67.	It is not necessary for me to consider these points in any detail.  I should record what I understood to be common ground, namely that the figure stated by the judge in paragraph 59 of his judgment to be $1.8m should have been $2.3m per annum.  Counsel for the Issuer accepted that unless his client was entitled to bring the costs of this litigation into the equation he had no prospect of establishing that the costs of the interposition would exceed the benefits to be derived under the Dutch DTA.  So the only point of principle appears to be whether it would be appropriate to bring those costs in to the debit of interposition.
68.	The issue is whether ‘the measure’ consisting of the interposition of Newco, assuming it to be available, is reasonable.  I cannot see how the cost of the investigation can go to the question of reasonableness.  The cost of ascertaining whether there is an available measure is not relevant to considering whether its adoption is reasonable; its availability is assumed for the purpose of the question of reasonableness.    The cost of litigating its availability is even further removed from the relevant question.   For my part therefore I would not bring into account for the purposes of reasonableness any of the costs of investigation or litigation.   Consequently had this question arisen in the narrow form in which it was presented to the judge I would have concluded that the cost of implementing the measure of interposing Newco did not outweigh the benefits to be derived from it.
Summary
69.	In summary therefore I would allow this appeal on the basis that:
(1) Newco could not have been the beneficial owner of the interest paid by the Parent Guarantor under the Loan Agreement for the purpose of Article 11.2 of the Dutch DTA; and
(2) Newco would have been resident in Indonesia for the purpose of Article 11.2; alternatively
(3) The doubts whether the two conditions for the application of Article 11.2, namely the beneficial ownership of the interest and residence of Newco are so great as to render the measure of interposing Newco unreasonable.
In those circumstances the remaining questions do not arise, but for completeness I would add:
(4) The interposition of Newco would not have given rise to a new loan for the purposes of Articles 11.4 and 11.9; in any event
(5) The costs of interposition would not have outweighed the benefits to be derived from it had the conditions of beneficial ownership and residence been satisfied.

Lord Justice Chadwick:
70.	 I agree that this appeal should be allowed for the first of the reasons given by the Chancellor: that, on the balance of probabilities, the Indonesian Tax Court would hold that a Netherlands company (“Newco”) interposed between the Parent Guarantor and the Issuer in the manner proposed was not the beneficial owner of the interest paid by the Parent Guarantor under the credit agreement of 18 June 2002. On that basis the requirement in article 11.2 of the double tax convention between Indonesia and the Netherlands (“the Dutch DTA”) would not be satisfied; and the obligation of the Parent Guarantor to account to the Indonesian tax authorities for withholding tax at a rate greater than 10% on that interest could not be avoided. The appellant has done enough to establish that there is no bar to early redemption under condition 6(b) of the loan notes which it issued. 
71.	The respondent, as trustee of the loan notes, sought to place much reliance on the fact that the Indonesian tax authorities have not challenged the assumption that the arrangements between the Parent Guarantor and the Issuer – which have been in place since June 2002 and which depended for their effect on provisions of the double tax convention between Indonesia and Mauritius (“the Mauritius DTA”) until revoked – did have the effect of limiting the withholding tax for which the Parent Guarantor was accountable on the interest paid under the credit agreement to 10%. It is said that the judge was right to accept that the Issuer had not shown any reason why, if those arrangements had the desired effect, the proposed new arrangements would not also have that effect.
72.	There are, I think, three answers to that point. First, the fact that the Indonesian tax authorities have not challenged that assumption is no indication as to what decision the Indonesian Tax Court would have reached if there had been a challenge. I agree with the Chancellor that the reasons which lead to the conclusion (in the context of article 11.2 of the Dutch DTA) that Newco would not be treated by that court as beneficial owner of the interest payable by the Parent Guarantor under the proposed new arrangements lead also to the conclusion (in the context of article 11.2 of the Mauritius DTA) that the Issuer would not have been (or would not be) treated by that court as beneficial owner of the interest paid by the Parent Guarantor under the existing arrangements. The point has not been tested in the Indonesian Tax Court. There is no basis for a submission which suggests that the Indonesian Tax Court would be departing from a previously accepted position.
73.	Second, the approach which the Indonesian tax authorities would now take in relation to arrangements which are perceived to be driven by an intention to avoid Indonesian tax by the use of conduit companies resident in countries with whom Indonesia has entered into double tax conventions for the purpose of promoting trade is seen in the circular of 7 July 2005, to which the Chancellor has referred. And that circular should be read in the context of the statement issued by the Indonesian tax authorities at the time of the revocation of the Mauritius DTA. Whatever may have been the approach of those authorities in 2002, there can be no doubt, now, that the declared policy of the Indonesian authorities is to resist the use of conduit companies to obtain favourable tax treatment under double tax conventions.
74.	Third, there can be no doubt that the Indonesian tax authorities would regard Newco as a conduit company – as appears from the letter of 24 June 2005 from the Director General of Taxes. As the Chancellor has observed, the points made in that letter – whatever their genesis – are consistent with the views expressed in official commentaries on the OECD model convention; and they must be taken seriously. There is no reason to think that they would not carry weight in the Indonesian Tax Court. 
75.	The conclusion that the Indonesian Tax Court would hold that (“Newco”) was not the beneficial owner of the interest paid by the Parent Guarantor under the credit agreement for the purposes of the Dutch DTA is sufficient to dispose of this appeal. It is unnecessary to decide whether the Indonesian Court would hold, also, that Newco was not resident in the Netherlands – on the ground that its “effective management” (in the context of article 4.4 of the Dutch DTA) was situated in Indonesia. On that point my provisional conclusion differs from that reached by the Chancellor; but I do not think that any useful purpose would be served by a detailed analysis. I prefer not to decide the point in the present case. I should add, however, that had I reached the conclusion that on the balance of probabilities the Indonesian Tax Court would hold that Newco was resident in the Netherlands, I would have had no doubt that the point was so finely balanced that it would not be reasonable to expect a commercial organisation to enter into arrangements which would lead, inevitably, to the need to test that point in litigation. 
76.	The remaining questions do not arise. Save that I too, am not persuaded that the costs of investigation and (a fortiori) the costs of this litigation are of any relevance to the question of “reasonableness”, I express no view.
Sir Peter Gibson:
77.	I agree that this appeal should be allowed for the reasons given by the Chancellor and Chadwick LJ on the beneficial ownership issue.  Consequently, it is unnecessary and I would prefer not to decide the residence issue.  Subject only to that, I respectfully agree with the views expressed by the Chancellor in his judgment.