PPh 23 Correction Fails! The Strategy to Fight Deemed Interest and Double Correction on Shareholder Loans at the Tax Court

The implementation of Article 12 of Government Regulation Number 94 of 2010 concerning loans from shareholders once again becomes the central point of a tax dispute, particularly where it intersects with the withholding obligation of Income Tax Article 23 (PPh Pasal 23). In Tax Court Decision Number PUT-009201.12/2023/PP/M.XIIIA Tahun 2025, the Panel of Judges granted the appeal filed by PT SSS in full, confirming that the deemed interest expense correction applied by the tax authority does not automatically create a PPh Article 23 withholding object. This decision highlights the necessity of consistency between Corporate Income Tax (CIT) corrections and their subsequent PPh Withholding implications.

Origin of Conflict: Deemed Interest and Shareholders Loans

The core conflict in this case originated from the correction made by the Respondent (DGT) to the PPh Article 23 Tax Base for the August 2018 tax period, which was based on interest expense deemed to exist (deemed interest expense). This correction resulted from an equalization between the interest expense recognized in the Financial Statements and the PPh Article 23 returns, where the shareholder loan did not meet the formal requirements for a non-interest-bearing loan as stipulated in Article 12 paragraph (1) of PP 94 of 2010. Consequently, the DGT applied Article 12 paragraph (2) to determine an arm's length interest rate. The DGT argued that this deemed interest constitutes income for the shareholder and is therefore subject to PPh Article 23 withholding by the Taxpayer.

Appellant Defense: The Impact of Debt to Equity Ratio (DER)

The Appellant, on the other hand, argued that there was no real interest payment and that this fictional PPh Article 23 correction violated the principle of legal certainty. The Appellant’s key contention was the annulment of the CIT correction for the same interest expense, which was due to the application of the Debt to Equity Ratio (DER) regulation. The application of the DER rule resulted in the fiscally recognized interest expense being zero (nihil). This logic is crucial because if the interest expense is nihil for CIT purposes, there is no underlying interest payable to be subjected to PPh Article 23 withholding.

Judicial Resolution: Rejecting Double Correction

The Panel of Tax Court Judges provided a robust legal opinion. The Panel specifically pointed out the double correction applied by the Respondent—the application of deemed interest expense followed by the application of the Minister of Finance Regulation on DER. The overall effect of this double correction was that the fiscally recognized interest expense became Rp0.00. Therefore, the Panel concluded that no PPh Article 23 object existed to be withheld. The Judges clearly separated the concept of deemed interest expense correction (which aims to correct an expense in CIT) from the PPh Article 23 withholding obligation, which fundamentally requires the realization of income.

Analysis and Key Takeaways

The implication of this Tax Court Decision is highly significant for the tax practices of taxpayers engaging in loan transactions with shareholders. The decision sets an important precedent that the imposition of income on a deemed basis does not automatically create a tax withholding obligation, unless the correction genuinely results in an amount payable that meets the definition of a PPh Article 23 object. For taxpayers, the key takeaway is the importance of presenting evidence of substance (no real interest payment) and ensuring the consistency of arguments across different types of taxes under dispute.