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Tax Alert: Update to Controlled Foreign Corporation (CFC) Rules | 1
Update to Controlled Foreign Corporation (CFC) Rules
Tax AlertJuly 2019
Executive Summary
The Minister of Finance (MoF) has released amending regulations which limit the types of profits of a Non-Listed Foreign Entity (NLFE) which can be a deemed dividend in Indonesia. Regulation No. 93/PMK.03/2019 (PMK-93) states that it is intended to encourage transparency and provide legal certainty as well as fairness on the taxation of Indonesian taxpayers for capital investment in a NLFE.
In this alert we will use the terms Direct CFC and Indirect CFC to refer to directly and indirectly owned NFLEs to which the regulations apply.
The CFC rules now only target specific types of income, to calculate any deemed dividend to the Indonesian taxpayer on its capital investment in the CFC. PMK-93 is effective starting fiscal year 2019 and amends MoF Regulation No. 107/PMK.03/2017 (PMK-107). Other key aspects of PMK-93 are unchanged.
This will be a welcome development for many Indonesian groups with active trading businesses offshore. This Alert summarizes the changes and notes some interesting issues and areas of practical complexity taxpayers may encounter.
2 | Tax Alert: Update to Controlled Foreign Corporation (CFC) Rules
Key aspects of PMK-93:
1. Change to the types of income which can be attributed as deemed dividends
The deemed dividend under PMK-93 is now only applicable on Certain income (generally types of passive income) of a CFC. This is applicable for both Direct and Indirect CFCs. Previously under PMK-107, the deemed dividend was based on all income.
Certain income under PMK-93 is defined as:
a) Dividends, except dividends received and/or earned from a controlled NLFE (i.e. an Indirect CFC). Note, any such dividends from Indirect CFCs are covered separately in the regulation;
b) Interest, except interest received and/or earned by a CFC owned by an Indonesian bank. However, interest received and/or earned by a CFC from a direct or an indirect transaction with an Indonesian related party is not excepted;
c) Rental income:
(i) received by a CFC for the use of land and/or building; and
(ii) rental income other than for land and/or buildings, received by a CFC from transactions with its related parties. Note, therefore, the rental of equipment to related parties is captured as “Certain income”;
d) Royalties; and
e) Gain from the sale or transfer of assets (keuntungan karena penjualan atau pengalihan harta).
2. Change to the basis of deemed dividend calculation
As a consequence of the point above, the deemed dividend is calculated by multiplying the percentage of shareholding interest of the Indonesian taxpayer in the Direct CFC by the deemed dividend basis.
The basis of deemed dividend under PMK-93 is the net amount after tax of the CFC’s Certain income. Previously under PMK-107, the basis of deemed dividend was the profit after tax of the Direct CFC.
If an Indonesian taxpayer owns a direct shareholding interest in a Direct CFC and an indirect shareholding interest in an Indirect CFC, the deemed dividend amount is calculated by multiplying the percentage of shareholding interest of the Indonesian taxpayer in the Direct CFC with the deemed dividend basis of:
a) net Certain income after tax of the Direct CFC; plus
b) net Certain income after tax of the Indirect CFC multiplied by the percentage of shareholding interest of the Direct CFC in the Indirect CFC.
We illustrate below an example on how to calculate the deemed dividend amount if an Indonesian taxpayer has Direct and Indirect CFC interests (adapted from Example 9 in the regulation).
Tax Alert: Update to Controlled Foreign Corporation (CFC) Rules | 3
Net amount after tax of Certain income is defined as the gross amount of Certain income less:
a) Expenses to earn, collect and maintain such Certain income; and
b) Income tax payable, paid or withheld on the Certain income, in case there is income tax payable, paid or withheld on such Certain income.
3. Issues to note
a) Where CFCs have both Certain and other income, an exercise will need to be undertaken to allocate and apportion expenses of the CFC, and to determine whether any foreign taxes paid relate to Certain, or other incomes. This could be complex and time consuming in some cases.
b) There is no de minimis rule where CFCs have combined incomes.
c) It appears a deemed dividend can be triggered where there is positive net Certain income, even if the CFC has an overall loss.
PT ABC
Indonesia60%
Country YXYZ Ltd
70%
Country X
MNO Pte. Ltd
Please do not hesitate to contact our Tax Partners or engagement teams.
d) Taxpayers will need to take a view on the Certain income category regarding gains from the sale or transfer of assets (keuntungan karena penjualan atau pengalihan harta), and which assets of an active trading business will trigger Certain income when disposed.
e) Other key aspects of the CFC rules are unchanged, including:
(i) Determination of a CFC
(ii) Timeline for when the deemed dividend is received
(iii) Offsetting deemed dividend against actual dividends
(iv) Treatment of trusts and similar entities
(v) Inability to offset profits and losses of different CFCs
For tax year 2018:
• Net Certain income amount after tax for XYZ Ltd is USD1,500,000 (excluding any dividends from MNO Pte. Ltd.);
• Net Certain income amount after tax for MNO Pte. Ltd is USD1,000,000.
• XYZ Ltd and MNO Pte. Ltd must file their annual income tax return on 30 April 2019. Therefore, dividend from XYZ Ltd. is deemed to be received by PT ABC on 31 August 2019.
• Exchange rate of IDR/USD on 31 August 2019 is IDR11,550/ USD.
Deemed dividend amount is calculated as follows:
60% x (USD1,500,000 + (70% x USD1,000,000)) = USD1,320,000
Deemed dividend amount that should be reported in PT ABC’s 2019 annual income tax return is:
USD1,320,000 x IDR11,550 = IDR15,246,000,000.
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