Based on Government Regulation No. 94/2010 (Peraturan Pemerintah No. 94/2010) on the Calculation of Taxable Income and Payment of Income Tax in the Current Year, an interest-free loan from a shareholder provided to a taxpayer – a limited liability company (PT PMA / PT PMDN) – is permitted provided the following conditions are met. Scroll through the carousel to see all 4 mandatory conditions and learn about the tax consequences in case of non-compliance. This information can protect your business from reassessments and penalties.
Source of Funds: The loan is provided from the shareholder’s own funds, not from third parties.
Full Payment for Shares: The creditor-shareholder has fully paid his/her portion of the authorized capital.
Financial Condition of the Shareholder: The creditor-shareholder is not in a state of loss.
Condition of the Borrowing Company: The borrowing LLC is experiencing financial difficulties that threaten the continuity of its operations.
If Conditions Are Not Met
If a loan received by a taxpayer (LLC) from its shareholder does not meet the conditions specified in point (1), interest is charged on the amount of such loan at the market (fair) rate.
Market (Fair) Rate is the interest rate that would apply in accordance with the principles of reasonableness and customary business practice (best practice), if the transaction were concluded between parties that are not related persons, as defined in Article 18, Paragraph (4) of the Income Tax Law.
Tax Consequences in Case of Non-Compliance
If an interest-free loan does not meet the requirements of Article 12 of Government Regulation (PP) 94/2010, this entails the following consequences:
1. Negative Tax Adjustment: Interest at the market rate will be charged on the loan, leading to a negative tax adjustment (increase in expenses in the form of loan interest).
2. Article 23 Personal Income Tax (PPh 23) Adjustment: The negative adjustment may automatically result in:
A positive adjustment for Article 23 Personal Income Tax (withholding tax on interest).
Underpayment of the said tax.
3. Tax Penalties: The taxpayer may also be held liable under Paragraph (2) of Article 13 of the General Provisions and Taxation Procedures Law (UU KUP).
