Treaty Abuse Prevention Mechanisms in Minister of Finance Regulation Number 112 of 2025

Introduction

The core of this regulation is the assertion that DTA benefits—such as lower tax rates or tax exemptions—are not automatic rights. Article 2 paragraph (4) explicitly requires that a Non-Resident Taxpayer (WPLN) must meet three cumulative criteria: they are not an Indonesian resident taxpayer, they are a resident of the DTA partner country, and crucially, they do not engage in treaty abuse. The definition of treaty abuse is formulated as an attempt by a WPLN to reduce, avoid, or defer tax payments contrary to the object and purpose of the DTA.

Article 18 of PMK 112 of 2025 grants broad authority to the Director General of Taxes to prevent abuse through six main anti-avoidance instruments. This article dissects these mechanisms in depth along with illustrations of their application.

1. The Beneficial Owner Concept: Countering "Shell" Companies

The first and most fundamental instrument is the establishment of the Beneficial Owner (BO) criteria. Article 19 asserts that a WPLN acting as an Agent, Nominee, or Conduit Company is not entitled to DTA benefits.

An entity is considered a BO only if it has full control to use or enjoy the funds/assets, bears the risk on those assets, and has no obligation to pass on the majority of its income. Specifically, this PMK prohibits back-to-back practices where a WPLN uses more than 50% of its income to satisfy obligations to third parties.

2. Shareholding Period: Preventing Dividend Stripping

The second mechanism targets dividend stripping. Article 20 stipulates that preferential dividend rates are only granted if the WPLN satisfies a minimum shareholding period of at least 365 calendar days, including the day of dividend payment.

3. Look-Back Rule for Capital Gains

Article 21 regulates capital gains on land-rich companies. Taxing rights reside in Indonesia if the value of immovable property in Indonesia exceeds a certain threshold (e.g., 50% of total assets).

The look-back period test ensures the property ratio is met "at any time" within the 365 calendar days preceding the transfer. This prevents "asset dilution" where WPLNs inject cash shortly before a sale to drop the property ratio below 50%.

4. Prevention of Permanent Establishment (PE) Avoidance

PMK 112 of 2025 aggressively closes loopholes for avoiding PE status through three main methods:

• A. Splitting of Contracts

  Article 23 prevents splitting construction projects into small contracts to avoid time tests. The regulation mandates the aggregation of time periods for projects executed by the WPLN and its closely related persons at the same location.

• B. Commissionaire Arrangements

  Article 24 targets agents who substantially play the principal role leading to contracts. If an agent in Indonesia habitually negotiates key elements without material modification by the head office, a PE is deemed to exist.

• C. Fragmentation of Auxiliary Activities

  Article 25 prevents the abuse of "preparatory/auxiliary" exemptions. If cohesive operations are fragmented into small tasks across locations to appear auxiliary, the DGT will combine them to establish PE status.

5. Limitation on Benefits (LOB)

Article 27 applies the LOB clause as an objective test. It looks at hard facts: Is the WPLN publicly traded? Is it owned by residents of the partner country? Does it pass the base erosion test? Failing this mechanical test indicates a lack of genuine economic connection to the domicile country.

6. Principal Purpose Test (PPT)

The ultimate safety net. Article 28 states DTA benefits will be denied if "one of the principal purposes" of the transaction is to obtain the benefit.

The PPT lowers the burden of proof; authorities only need to show the tax motive was dominant. It analyzes the scheme, timing, and economic substance vs. form.

Conclusion