The Indonesian Director General of Mineral, Coal and Geothermal
("Director General") issued Regulation No. 376.K
("Regulation 376.K"), which clarified
the restrictions on the use of related party mining services
companies under Law no. 4 of 2009 (the "2009 Mining
Law"). Regulation 376.K opens up the possibility of
up to five Izin Usaha Pertambangan (IUP) or Izin Usaha
Pertambangan Khusus (IUPK) concession holders using a related
party mining services company, which will enable a certain degree
of risk and cost sharing between investments.
Prior to the enactment of the 2009 Mining Law, related party mining
services companies had been commonly used for two purposes. The
first is to enable a foreign party to exercise a degree of
operational control over domestic companies holding kuasa
pertambangan (KP) concessions under the previous law. The
second purpose is to facilitate a degree of risk and cost sharing
between mining concessions.
The 2009 Mining Law rendered the first use redundant as it opened
up the new IUP concessions for direct foreign ownership. However, a
key principle of the 2009 Mining Law was to establish each IUP
concession as a separate company with a separate profit centre. As
such, a Ministerial Decree was enacted to restrict the use of
related party mining services companies without consent from the
Director General. Regulation 376.K provides additional colour to
the Ministerial Decree by granting approval for IUP holders to use
related party mining services companies in which the IUP holder
owns at least 20% of the equity.
In practice, the use of related party mining services companies
enables an owner of multiple concessions to offset profits from the
first producing concession against development costs for future
concessions. At the very least, this could result in a significant
deferral of taxable revenues - and in the event future concessions
proved to be unsuccessful, potentially setting the losses off
against profits from earlier successful concessions. By permitting
related party mining services companies to conduct the mines
operations, Regulation 376.K once again opens up this possibility -
although to some extent limited in its application.
As Regulation 376.K requires each IUP holder to own 20% in the
related party mining services company, this limits the theoretical
number of IUP holders that can use the same service provider to
five. In practice, however, a 20% stake is unlikely to be
efficient, as post-tax dividend income from the mining services
company would be subject to taxation a second time in the IUP/IUPK
company level. For this reason, it is likely to be far more
efficient to pool services amongst four IUP holders each with a 25%
stake in the mining services company, thus enabling the IUP/IUPK
holders to rely on a participation exemption against double
taxation in portfolio companies. Accordingly, there is a practical
limit of four IUP/IUPK holders that can benefit from shared risks
and costs through one related party mining services company, with
an indicative structure as follows:
We believe Regulation 376.K opens up the potential to add a
valuable element of risk and sharing for holders of multiple
IUP/IUPK concessions through the use of related party mining
services companies.
Furthermore, the variety of sensible options available for mining
companies to share the risks and costs between multiple IUP/IUPK
concessions is enhanced by combining other structuring options such
as the use of common centres for equipment leasing and
financing.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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