Indonesia Advisory

Guidance issued on definition of beneficial owner for treaty purposes
By Bagus Brahmantya (http://www.deloitte.com)

Indonesia’s Director General of Taxation issued a circular (Circular Letter No. SE-03/PJ.03/2008) on 22 August 2008 that provides a new definition of “beneficial owner” for tax treaty purposes as well as guidance on the responsibilities of domestic payors making dividend, interest or royalty payments to nonresidents. The new circular revokes two previous circulars (Circular Letters No. SE-04/PJ.34/2005 and No. SE-02/PJ.3/2006).

The old circulars have been replaced because of their “controversial” position on special purpose vehicles (SPVs). For example, the 2005 circular stipulated that an SPV in the form of a conduit company, paper box company, pass-through company, etc., could not be treated as a beneficial owner to qualify for the reduced rates of withholding tax under a tax treaty. As a result, dividends, interest and royalties paid to offshore SPVs were subject to the normal 20% withholding tax. This rule gave rise to numerous disputes during tax audits.

The new circular defines a beneficial owner as the actual owner of dividend, interest or royalty income, and the person entitled to directly enjoy the benefits of such income. Where a domestic taxpayer pays dividend, interest or royalties to a nonresident, the domestic taxpayer must withhold tax due in accordance with the income tax law. For the domestic taxpayer to withhold at a lower treaty rate, it must be certain that:

The nonresident recipient of the income is a resident of the other contracting state, as evidenced by a valid certificate of domicile; and

The nonresident is the actual owner of the income and the one entitled to directly enjoy the benefits of the income as mentioned in the treaty.

Unless both requirements are met, the domestic taxpayer must withhold tax at a rate of 20%.

The new circular is silent on SPVs and their status as beneficial owners. It does state, however, that another circular will be issued to provide guidance and set out procedures for applying the provisions of a tax treaty. That circular is expected to clarify the procedures and documentation required to support a claim of beneficial owner status.