An Indonesian company can borrow from a foreign parent or another group company, but the interest is not automatically fully deductible. Indonesia’s transfer pricing and debt-to-equity rules may limit the deduction, while interest paid or payable to a foreign lender may trigger an Article 26 withholding tax.
Offshore intercompany loans can also create Bank Indonesia reporting obligations.
How Should an Intercompany Loan Be Structured?
An intercompany loan should establish the amount borrowed, currency, interest rate, maturity, repayment terms, and the rights and obligations of the borrower and lender.
The actual financing should match those terms. If an agreement requires interest and scheduled repayments but the Indonesian subsidiary repeatedly receives additional funding without making repayments or recording interest as agreed, the loan may be treated differently from how it is described in the agreement.
Related-party financing is subject to Indonesia’s transfer pricing requirements.
What Interest Rate Can a Foreign Parent Charge?
The interest rate on a related-party loan must satisfy the arm’s-length principle.
The appropriate rate can depend on the borrower’s credit profile, currency, loan term, amount, security, seniority, and other terms and circumstances of the loan.
An interest rate above the arm’s-length amount can result in part of the interest deduction being denied even where the company remains within Indonesia’s debt-to-equity limit.
Funding an Indonesian subsidiary through an intercompany loan? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com to review the tax treatment in Indonesia
How Does Indonesia’s Debt-to-Equity Ratio Affect Interest Deductibility?
Indonesia generally applies a maximum 4:1 debt-to-equity ratio for corporate income tax purposes under PMK 169/2015, subject to exclusions for certain taxpayers and industries.
Where the applicable debt exceeds the permitted ratio, part of the borrowing costs can become non-deductible for corporate income tax purposes.
For example, if an Indonesian company has IDR 5 billion (USD 292,000) in equity, a 4:1 ratio would correspond to debt of IDR 20 billion (USD 1.17 million). Debt above the permitted level can restrict the amount of borrowing costs available as a tax deduction.
Staying within the 4:1 ratio does not automatically make all interest deductible. Related-party interest must separately satisfy the arm’s-length principle.
Is Withholding Tax Due on Interest Paid to a Foreign Group Company?
Interest paid or payable by an Indonesian company to a foreign related party is generally subject to Article 26 withholding tax.
The domestic rate is generally 20% of the gross interest amount. A lower rate may apply under an applicable double tax agreement if the lender is eligible for treaty relief.
For example, IDR 2 billion (USD 117,000) of interest payable to a foreign parent would produce IDR 400 million (USD 23,000) of withholding tax at the domestic 20% rate before any available treaty reduction.
Withholding tax and interest deductibility are separate. Interest can be subject to withholding tax even where part of the expense is not deductible by the Indonesian borrower.
Can an Intercompany Loan Be Interest-Free?
An interest-free loan between related parties is still subject to Indonesian transfer pricing rules.
The company may need to show that the interest-free terms are consistent with what independent parties would agree in comparable circumstances.
There is no single minimum interest rate that can automatically be applied to every related-party loan.
How Is an Intercompany Loan Recorded in the Financial Statements?
The Indonesian borrower records the financing under the applicable Indonesian financial accounting standards.
Interest is recorded according to the applicable accounting treatment rather than solely when cash is transferred to the lender.
The loan is recorded as a current or non-current liability based on when the company is required to repay it and the applicable accounting rules.
What Happens When the Loan Is Denominated in Foreign Currency?
A foreign-currency intercompany loan creates exchange-rate exposure for an Indonesian company whose functional currency is rupiah.
Foreign-currency loan balances are translated using the applicable closing exchange rate at the reporting date. Exchange differences are generally recognized in profit or loss under the applicable accounting rules.
Receiving funding from an overseas group company? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com for support with your intercompany loan
For example, an outstanding foreign-currency loan recorded at IDR 16 billion (USD 940,000) would increase to IDR 16.8 billion if the rupiah value of the liability increased by 5%. The IDR 800 million (USD 47,000) difference can affect reported profit even though the foreign-currency principal remains unchanged.
What Documentation Should Support the Loan?
The loan agreement should establish the principal, currency, interest rate, maturity, repayment terms, and other main loan terms.
Where Indonesia’s documentation thresholds are met, related-party financing should also be covered by the company’s transfer pricing documentation.
The company’s accounting records should reflect the principal outstanding, interest, repayments, and foreign-exchange movements.
Does an Offshore Intercompany Loan Need to Be Reported in Indonesia?
An intercompany loan from an overseas parent or group company can fall under Indonesia’s foreign loan reporting rules.
Bank Indonesia requires Indonesian residents to report certain foreign debts and related information where the reporting requirements apply.
Certain Indonesian non-bank companies with foreign-currency debt can also be subject to requirements covering hedging, liquidity, and credit ratings, subject to the applicable rules and exemptions.
Contact MAP Resources Indonesia About Intercompany Loans
MAP Resources Indonesia supports foreign-owned companies with the Indonesian treatment of intercompany financing. Contact MAP Resources Indonesia at info@mapresourcesindonesia.com to review an existing loan or structure new related-party financing.
