PURCHASE AND SALE OF INTEREST IN CoW
A CoW allows the CoW company to transfer all or part of its interest in the CoW, subject to the prior written consent of the Minister of Mines and Energy. On such a transfer, the CoW company is not relieved of any of its obligations under the CoW, except to the extent that the transferee assumes and performs such obligations.
Theoretically, the transferor must include the proceeds of sale in income for income tax purposes, and the transferee is entitled to write off the purchase price in accordance with the rules for deducting the cost of tangible and intangible assets. However, to date, transfers of interests in CoWs have been rare, and it is possible that the tax authorities might impose an alternative tax treatment as a condition of approving the transfer.
PURCHASE AND SALE OF SHARES IN A CoW COMPANY
The shareholders in the CoW company require the prior written consent of the Minister of Mines and Energy for a transfer of shares of the CoW company. Under the terms of the CoW, such consent shall not be unreasonably withheld or delayed. Consent is not required in the case of a transfer of shares to:
- Indonesian Participants (as defined); or
- An affiliate or subsidiary of the shareholder.
UNINCORPORATED JOINT VENTURES
As alluded to above, transfers of partial interests in CoWs are rare events, and require some degree of negotiation with the Minister of Mines and Energy. For this reason, joint venture ownership and operation is equally unusual. The CoW and the income tax legislation of general application are silent as to the tax treatment of joint ventures. The tax treatment of a joint venture is one of a number of matters to be negotiated with the Minister in conjunction with the transfer of an interest in the CoW that creates the joint venture.
The CoW and the income tax legislation of general application do not address farm-ins per se. As a commercial matter, a typical farm-in to a mineral property involves an eventual transfer of an interest in the property. Accordingly, the farm-in arrangement, and the tax treatment thereof, will be considered by the Minister in conjunction with his consideration of approval of the transfer. A farm-in can usually be effected more easily by a transfer of shares in the offshore investing company.
Commercially, two parties can contractually create a royalty interest in a mineral property under the terms of a joint venture arrangement, a farm-in, or other arrangement that involves a transfer of ownership in the property (for example, the creation of a retained royalty interest).
The tax treatment of royalty payments, which are made pursuant to the ownership of a royalty interest, is not prescribed in the CoW or the tax legislation of general application. It is understood that the Ministry of Finance is of the view that the ownership of a royalty interest is a form of equity participation in the company’s business and, accordingly, the payment of a royalty is not deductible by the company. Whether or not dividend or royalty withholding tax is withheld from the payment, and the level of withholding tax, will depend on the view of the Director General of Tax and the jurisdiction of the recipient.
TRANSACTIONS BETWEEN RELATED PARTIES
Where a “special relationship” exists between two parties, a transfer of property from one party to the other must be effected at the fair market value of the property. The term “special relationship” is specifically defined. For example, a special relationship exists where one company owns 25 percent or more of another company.
In late-1998, the Government introduced income tax regulations that, in certain circumstances, allow property to be transferred at written down tax values on a merger of companies, or a liquidation of one company into another. Also, in certain defined cases, prior years’ losses can be transferred on a merger or liquidation.