Incorrect WHT Art 23 Cutting: Tax Court Rules Franchise Fee is a Service, Not Pure Royalty

Tax Court Decision on Qualification of Continuing Franchise Fee of PT AM

Tax Court Decision Number PUT-006646.12/2023/PP/M.XIIIB Year 2025 sets an important precedent regarding the qualification of 'Continuing Franchise Fee'. In this dispute, the Panel of Judges rejected the appeal of PT AM, upholding the Directorate General of Taxes (DGT) correction which classified the franchise payment as "franchise services" (a 2% WHT Article 23 object) under PMK-141/PMK.03/2015, rather than pure "royalty" (a 15% rate).

Origin of WHT Article 23 Correction and DGT's Assessment

This dispute originated from a WHT Article 23 correction for the December 2020 tax period, where the Respondent (DGT) assessed a tax base of IDR 171.4 Billion on payments made by PT AM (Appellant) to the franchisor. The DGT argued that this 'Continuing Franchise Fee' payment was consideration for "franchise services," which are explicitly listed in PMK-141 as an object of WHT Article 23 (other services) subject to a 2% rate. The Respondent found that the Appellant had not withheld this tax.

Conflict Over Object Qualification: Royalty vs Franchise Services

The core conflict in the trial was the object's qualification. The Appellant strongly contested the correction. They argued that the payment was purely "royalty" for the use of intellectual property rights (trademarks), which is an object of WHT Article 23 at a 15% rate under Article 23 paragraph (1) letter a of the Income Tax Law. The Appellant asserted they had already withheld and remitted this 15% tax, thus the DGT's correction (applying a 2% rate to the same object) was deemed erroneous and resulted in double taxation.

Judicial Findings on Bundled Franchise Agreements

The Panel of Judges, after examining the Franchise Agreement underlying the transaction, took a different stance. It was found that the 'Continuing Franchise Fee' (set at 5% of Gross Sales) constituted a single, inseparable (bundled) package of remuneration. This package included the license to use IPR (a characteristic of royalty) as well as other support services, such as training, system support, and ongoing operational management. The Panel opined that the substance of this transaction was more accurately classified as "franchise services" as specifically regulated in PMK-141.

Key Takeaway and Qualification Risk in Franchise Fees

This decision highlights the qualification risk inherent in bundled franchise agreements. When a payment covers both royalty and various support services within a single consideration, tax authorities tend to refer to PMK-141, which specifically lists "franchise services" as a WHT Article 23 (other services) object. Consequently, the Panel of Judges rejected the Appellant's appeal and upheld the Respondent's correction, affirming the transaction as an object of WHT Article 23 for franchise services.

A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here