On September 9, 2015, Minister of Finance issued Regulation NO. 169/ PMK.010/2015 regarding DEBT TO EQUITY RATIO ("DER") for the purpose of income tax calculation. The maximum DER shall be 4:1. The definition of debt in this regulation covers short and long-term debt/loan and trade payable with interest bearing, from both related parties and third parties.
The maximum interest expenses and related financing costs that can be deductible should be based on 4:1 DER. The excess of interest expense/ financing cost will be treated as non-deductible expenses. In the event a company's equity is zero or deficit, all interest expense will be treated as non-deductible expenses.
Moreover, the regulation also covers a taxpayer who has a foreign loan (private loan). The individual is required to submit a report to the Directorate General of Tax Regulation (DGT). In the event the taxpayer fails to submit the report, the interest expense on the foreign loan cannot be treated as a deductible expense. The reporting procedure will be regulated under the DGT Regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.