Controlled Foreign Companies – Significant Changes

Indonesian tax residents with controlling holdings in overseas entities should ensure that they fully consider the impact of recent changes. Many will find that they face a significant increase in taxable income THIS YEAR.

The changes referred to are brought about by MoF regulation 107/PMK.03/2017, Indonesia’s new CFC legislation, which states that any profits made by unlisted overseas entities in which Indonesian residents hold equity of 50% or above will be deemed to have been received by the Indonesian residents at the latest seven months from year end. Astute observers may say that has been the case since 2008 (under MoF regulation 256/PMK.03/2008), which is true, however the revision allows for the same treatment on indirect holdings, mentions that trust structures and similar will be considered ‘pass-through’ entities – investments considered owned by the settlor(s) – and removes the ‘loophole’ many relied upon to avoid such deeming. This ‘loophole’ was that the previous regulation suggested that if actual dividends were received by the Indonesian investors the deeming provisions would not have effect and some tried to take advantage of this to reduce the level of taxable income declared.

The impact of these changes, combined with automatic exchange of information, is that very few options remain to allow for deferral of tax on income from overseas assets and many Indonesian taxpayers will find that layered structures or those involving trusts no longer offer the protection envisaged at the time of set-up.

The regulation also states that actual dividends received within five years of any deemed dividends will not be considered taxable income and covers the methodology for obtaining the benefit of foreign tax credits on dividends paid.