Interest paid by an Indonesian company to a foreign lender is generally subject to Indonesian withholding tax. The domestic rate is generally 20% of the gross interest, although an applicable tax treaty may reduce the rate.
For foreign investors using overseas loans to fund an Indonesian company, this tax can affect both the cost of the loan and the amount the foreign lender receives.
When Is Interest Subject to Withholding Tax in Indonesia?
Interest paid to a foreign lender generally falls under PPh 26, Indonesia’s withholding tax regime for certain income paid to foreign taxpayers.
This can include interest in a shareholder loan from a foreign parent, an intercompany loan from another overseas group company, or financing from a foreign bank or other lender.
Paying interest to an overseas lender? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com for withholding tax support
The Indonesian borrower must withhold the applicable tax, pay it to the Indonesian tax authority, and report it.
What Withholding Tax Rate Applies to Interest?
If an Indonesian company owes USD 100,000 in interest to a foreign lender and the 20% domestic rate applies, it will withhold USD 20,000 and pay USD 80,000 to the lender.
A lower rate may apply when Indonesia has a tax treaty with the lender’s country of residence and the requirements for treaty relief are satisfied.
Foreign investors should not assume that the treaty rate applies simply because the lender is in a treaty jurisdiction. The conditions for using the reduced rate must also be met.
Can a Tax Treaty Reduce the Withholding Tax?
Some Indonesian tax treaties apply different interest withholding rates depending on the type of lender or financing.
The foreign lender generally needs to provide evidence of its tax residence and meet Indonesia’s requirements for claiming treaty benefits. The Indonesian payer also needs the required documentation to support the reduced rate.
Need to confirm whether treaty relief applies? Email info@mapresourcesindonesia.com to review your cross-border interest payment
Beneficial ownership and anti-treaty-abuse requirements can also matter. Routing financing through an entity in a treaty jurisdiction does not automatically make the interest eligible for that jurisdiction’s treaty rate.
Does the Loan Agreement Change the Amount the Indonesian Company Pays?
The tax rules determine the withholding rate, but the loan agreement can determine who bears the tax cost.
If the lender bears the withholding tax, the tax is deducted from the interest otherwise payable to the lender.
A loan agreement may instead contain a gross-up clause requiring the Indonesian borrower to increase the payment so that the lender receives an agreed net amount after Indonesian withholding tax.
A gross-up can make the actual cost of the loan to the Indonesian company higher than the headline interest rate.
Does Paying Withholding Tax Make the Interest Deductible?
Withholding the correct amount of PPh 26 does not automatically make the entire interest expense deductible for Indonesian corporate income tax.
An Indonesian company borrowing from a foreign shareholder or group company may need to show that the loan and interest rate comply with Indonesia’s transfer pricing requirements.
Using a shareholder or intercompany loan? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com for Indonesian tax support
Indonesia also limits the deduction of financing costs through rules covering debt levels and deductible interest expenses.
A company can correctly withhold tax from an interest payment but still be unable to deduct some or all the interest for corporate income tax purposes.
Contact MAP Resources Indonesia for Cross-Border Tax Support
MAP Resources Indonesia can assist foreign investors with withholding tax on overseas loan interest, tax treaty requirements, and the wider Indonesian tax treatment of cross-border financing. Contact us at info@mapresourcesindonesia.com.
