Interest-free Loan

In the business process of companies and businesses, borrowing and lending money or capital is common. The purpose of the loan also varies, such as increasing the company's capital, facilitating cash flow, or expanding the company's capacity.

From the lender's perspective, there are two types of loans or credit: loans to banks and loans to other parties. Loans made to banks are specifically regulated in Law No. 7 of 1992 on Banking, as amended by Law No. 10 of 1998. In these provisions, loans or credit are defined as the provision of money or bills that can be equalized based on an agreement or loan and borrowing agreement between a bank and another party that requires the borrower to repay the debt after a certain period by paying interest. The bank provides types and kinds of loans, including unsecured loans, working capital loans, people's business loans, investment loans, venture capital loans, and interest capital loans.

Loans to parties other than banks are regulated in Book 3 of the Civil Code, or Undang-Undang Hukum Perdata (KUHPer) on Obligations, which differs from loans to banks specifically regulated in the banking law. The regulation stipulates, among other things, that an obligation is born by agreement or law. In addition, the provision also regulates whether the obligation is intended to give something, to do something, or not to do something. 

In general, loans and/or agreements will give rise to an obligation to pay interest by the debtor to the creditor, as stipulated in Article 1239 of the Civil Code, which states that "every obligation to do something or not to do something must be completed by providing compensation for costs, losses, and interest if the debtor does not fulfill his obligations."

In the tax provisions, the imposition of loan interest and penalties is the object of Income Tax Article 23 on interest at a rate of 15%. For example, PT ABC borrows Rp 1.2 billion from PT XYZ with a fair interest rate of 10% and a loan term of 12 months. Against the loan, PT ABC has three obligations. First, PT ABC should return the loan principal based on the agreed engagement. Second, PT ABC should pay interest of Rp10 million. The interest of Rp10 million is obtained by multiplying the principal loan of 1.2 billion with a fair interest rate of 10%, then divided by the loan term of 12 months. Third, PT ABC should withhold and report Income Tax Article 23 amounting to 15% of the interest income earned by PT XYZ or amounting to Rp1.5 million. Thus, the interest income earned by PT XYZ on the transaction is Rp8.5 million every month.

However, in the business world, it is common for loans to be made without interest. Commonly, this is the practice between companies that have an affiliate relationship. For example, a parent company provides loans to its subsidiary because the subsidiary is developing a new business.

As mentioned above, the tax provisions impose special rules in interest-free loan transactions. Article 12 paragraph (1) of Government Regulation Number 94 of 2010 concerning the Calculation of Taxable Income and Payment of Income Tax in the Current Year, among others, regulates that interest-free loan transactions from shareholders received by taxpayers in the form of limited liability companies are permitted if:

1. The loan comes from the shareholders' funds and not from other parties;
2. The capital that should have been paid up by the lending shareholder has been fully paid up;
3. The lending shareholder is not in a loss-making condition; and
4. The limited liability company receiving the loan is experiencing financial difficulties for its business continuity.

 

Documents and/or data are required to support the fulfillment of the interest-free loan requirements as mentioned above. For example, to show that the loan comes from the shareholders, the taxpayer has to submit a bank statement document showing the flow of loan money from the shareholders to the taxpayer. Furthermore, to prove that the capital has been fully paid up, the taxpayer may submit the General Legal Administration, or Administrasi Hukum Umum (AHU), data from the Ministry of Law and Human Rights or notarial deed documents.

Based on the author's experience, to prove that the lender shareholder is not in a loss condition, the taxpayer can submit documents in the form of a profit and loss statement and the latest annual tax return. Next, to prove that the taxpayer receiving the loan is in financial difficulty, the taxpayer can submit documents in the form of financial statements, annual tax returns, periodic tax returns, and other documents.

Please remember that the requirements to get an interest-free loan approved are cumulative, which means that all requirements must be fulfilled. If one requirement is missing, the taxpayer is considered to have charged reasonable interest on the loan.

There are no provisions that further regulate the interest-free loan. Thus, the taxpayer needs to notify the tax service office to avoid the imposition of administrative sanctions in the form of interest if the tax authorities do not agree on the interest-free loan to be applied by the taxpayer. However, taxpayers can consult IDEATAX for consultation and litigation support on interest-free loan issues.