Foreign shareholders can fund an Indonesian company from overseas through equity or a shareholder loan. For a PT PMA, the funding method affects whether the money becomes permanent capital or a debt that can later be repaid.
A PT PMA generally requires at least IDR 2.5 billion (USD 150,000) in issued and paid-up capital. Its total investment must generally exceed IDR 10 billion (USD 600,000), with the calculation depending on the business activity.
Using Offshore Funds as Equity Capital
An increase in registered capital generally requires shareholder approval, a notarial amendment or corporate filing, and an update to the company’s corporate records. The company’s OSS data and investment reporting should also remain consistent with its updated capital structure.
For support with capital increases and reporting, email info@mapresourcesindonesia.com.
Under the current PT PMA rules, paid-up capital cannot be moved from the company’s account for at least 12 months after it is deposited, except to purchase assets, construct buildings, or fund the company’s operations.
Using a Shareholder Loan Instead of Equity
A shareholder or intercompany loan can provide additional funding without increasing the company’s registered share capital.
Unlike equity, the amount remains a liability of the Indonesian company and can be repaid according to the loan terms.
An offshore shareholder loan can create foreign debt reporting obligations. The company should have a written loan agreement covering the amount, currency, interest rate, repayment period, and other important terms.
Companies with foreign-currency debt may also need to comply with Bank Indonesia’s prudential requirements. Depending on the company’s debt and circumstances, these can include requirements relating to hedging, liquidity, and credit ratings. Exemptions apply in certain cases.
Bank Indonesia Reporting for Offshore Funding
Cross-border funding can create reporting obligations under Indonesia’s foreign exchange traffic, or Lalu Lintas Devisa (LLD), framework.
Bank Indonesia requires Indonesian residents that fall within the reporting rules to provide information on relevant transactions and financial positions involving overseas parties. Foreign debt can also require reporting on borrowing, drawdowns, repayments, and outstanding amounts.
An equity contribution should be recorded consistently as equity, while a shareholder loan should match the underlying loan agreement and be recorded as a liability.
This distinction should also be reflected in the company’s accounting records and, where relevant, its LKPM investment reports.
Tax Treatment of Offshore Equity and Shareholder Loans
An equity contribution is generally recorded as capital rather than taxable income of the Indonesian company.
A shareholder loan has different tax consequences. Interest paid by an Indonesian company to an overseas shareholder is generally subject to PPh 26 withholding tax at 20% of the gross interest. A lower rate may be available under an applicable double tax agreement if the required conditions and documentation are met.
The loan may also fall within Indonesia’s transfer pricing rules where the lender and borrower are related parties. The company should be able to support why the financing was needed and whether its terms, including the interest rate, are commercially reasonable.
Structuring a shareholder loan? Our team can assist at info@mapresourcesindonesia.com
Indonesia’s debt-to-equity rules can also affect how much interest expense the Indonesian company can deduct for corporate income tax purposes. Offshore financing should therefore be structured before the funds are transferred rather than addressing the tax treatment afterwards.
Can Offshore Equity Be Repaid to the Shareholder?
A genuine shareholder loan can generally be repaid according to its contractual terms, subject to the applicable banking, foreign exchange, tax, and reporting requirements.
Paid-up capital cannot simply be treated as a shareholder loan and withdrawn when the company has excess cash.
Funds invested as equity may ultimately be returned through mechanisms such as a lawful capital reduction, sale of the shares, or liquidation. Profits generated by the company can also be distributed separately as dividends, subject to the applicable corporate and tax requirements.
Converting a Shareholder Loan Into Equity
A foreign shareholder may later decide to convert an outstanding shareholder loan into equity.
Need help structuring offshore funding? Contact info@mapresourcesindonesia.com
The company must determine whether the conversion requires a capital increase, shareholder approval, notarial documentation, and updates to its corporate and investment records.
The resulting ownership structure must also comply with any foreign ownership restrictions that apply to the company’s business activities.
Choosing Between Equity and a Shareholder Loan
Equity is generally more suitable for funds intended to remain in the Indonesian business. A shareholder loan may be more suitable for additional funding that the parent company expects the Indonesian subsidiary to repay.
The two can also be combined. A foreign investor can provide the required PT PMA equity and use a properly structured shareholder loan for additional funding.
Structure Offshore Funding With MAP Resources Indonesia
MAP Resources Indonesia assists foreign investors with equity injections, shareholder and intercompany loans, capital increases, investment reporting, accounting, and the tax implications of cross-border funding. Contact us at info@mapresourcesindonesia.com.
