Debt-to-Equity Ratio, Foreign Loan Reporting Obligation

Rooted into Indonesia’s income tax regulatory framework is the authority of the Minister of Finance (the “MOF”) to determine the debt-to-equity ratio (“DER”) for corporate taxpayers. Such is contained under Article 18 (1) of Law No. 7 of 1983 regarding Income Tax, as lastly amended by Law No. 36 of 2008 (the “Income Tax Law”).

This authority was implemented more than 30 years ago under Minister of Finance Decree No. 1002/KMK.04/1984 regarding Stipulation of Debt-to-Equity Ratio for Purposes of Imposing Income Tax (the “1984 Decree”).

However, based on Minister of Finance Decree No. 254/KMK.01/1985 regarding the Postponement of Implementation of Minister of Finance Decree No. 1002/KMK.04/1984 dated 8 October 1984 regarding Stipulation of Debt-to-Equity Ratio for Purposes of Imposing Income Tax (the “1985 Suspension”), the application of the DER under the 1984 Decree was suspended until decided to be re-enacted by the MOF.

Only recently, in an effort to suppress the growing number of tax evasion/fraud (intentionally increasing the value of their loans to reduce the payable tax amount) by Indonesian corporations, the government has determined to reintroduce this DER stipulation on September 9, 2015 through the enactment of Minister of Finance Regulation No. 169/PMK.010/2015 regarding Stipulation of Ratio between Debt and Equity for Companies for the Purpose of Income Tax Calculation (“2015 Regulation”), revoking and replacing both the 1984 Decree and the 1985 Suspension.

Debt-to-Equity Ratio

The 2015 Regulation stipulates the DER for limited liability companies of four to one, four for debt and one for equity, which will apply starting at the 2016 tax year.[1] As comparison, the 1984 Decree determined a DER of three to one.[2]

This DER threshold under the 2015 Regulation does not apply to:[3]

  1. Banks;
  2. Financing companies;
  3. Insurance and reinsurance companies;
  4. Corporations engaging in the oil and gas sector, general mining, or in other types of mining bound by profit sharing contracts (kontrak bagi hasil), contracts of work (kontrak karya) or mining cooperation agreements (perjanjian kerjasama pengusahaan pertambangan) that specify their own DER;
  5. Corporations that have secured final income tax calculations; and
  6. Corporations in the infrastructure sector.

Debt-to-Equity Calculation

A company’s DER is calculated by comparing its average balance of debt and equity over a single fiscal year. If the abovementioned DER threshold under the 2015 Regulation is exceeded, the cost of the debts (loan interests, premiums, compensation, currency differences and the like) that is to be included into the income tax calculation will only include up to the DER ratio of four to one.[4]

For clarity, the costs of debts under the Income Tax Law deduct the taxable income base of a company. The bigger the debt of a company, more deductions can be made into the said company’s income tax calculations, resulting in a lesser final income tax amount. Upon the enactment of the 2015 Regulation, starting on the 2016 tax year, corporate taxpayers may only take into account the costs of debts up to the said DER threshold of four to one.

Further details on calculating DER will be provided under a Director General of Tax (the “DGT”) regulation.[5]

Foreign Loan Reporting Obligation

In addition to a DER threshold, the 2015 Regulation also stipulates a reporting obligation for corporate taxpayers regarding their foreign loans to the DGT. Failing to do so will prevent the respective taxpayer from including the cost of its foreign loans to deduct its income tax calculation.[6]

A regulation to be issued by the DGT is expected to further regulate this matter.[7]



[1] 2015 Regulation, Arts. 2 (1), and 7

[2] 1984 Decree, Art. 1

[3] 2015 Regulation, Art. 2 (2)

[4] 2015 Regulation, Arts. 1 (2) and (4), and 3 (1) and (2)

[5] 2015 Regulation, Art. 8

[6] 2015 Regulation, Art. 5 (1) and (2)

[7] 2015 Regulation, Art. 5 (3)


  1. February 9, 2016: “In an effort to suppress the growing number of foreign loans by Indonesian corporations” was changed to “In an effort to suppress the growing number of tax evasion/fraud (intentionally increasing the value of their loans to reduce the payable tax amount) by Indonesian corporations.” Credit for this edit: Yanuar Pribadhie of Makarim & Taira S., Counsellors at Law


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