The Tax Court Panel of Judges Confirms: Interest-Free Loans Are Valid If the Company Is Proven to Be Loss-Making

PTJPSI is a company engaged in the steel industry, with main products including billet steel and ingots. Since its establishment in 1981, the company temporarily ceased all production activities in 1994 due to consecutive losses that resulted in substantial debts. This decision was made by management as a risk mitigation measure to prevent further financial losses.

The dispute arose from corrections issued by the Directorate General of Taxes (DGT) regarding several transactions conducted by PTJPSI during the 2018 fiscal year. First, the DGT imposed a Positive Correction on Interest Income from Loans to Affiliated Parties amounting to IDR 1,325,283,358. This correction was based on the principle that intercompany loans between affiliated entities should bear interest, in accordance with arm’s length practices and standard business norms. Second, the DGT asserted that PTJPSI had received interest-free loans from its shareholder, LYS, totaling IDR 103,654,060,800 as of 31 December 2018, while the company was not in a loss-making condition nor experiencing liquidity difficulties. Consequently, the DGT imposed a Negative Correction on Loan Interest Expenses of IDR 8,646,476,238, applying the JIBOR + 2% benchmark. In addition, the DGT imposed a Positive Fiscal Adjustment of IDR 8,178,179,876 related to income subject to final and non-final income tax.

PTJPSI contested all corrections submitted by the DGT. The company emphasized that the positive correction on interest income of IDR 1,325,283,358 lacked a sound basis, as it was not supported by adequate formal or material evidence. The interest-free loans provided to affiliated entities originated from interest-free funds received by PTJPSI from its shareholder, and were not derived from interest-bearing liabilities as would be the case for financial institutions. PTJPSI further stressed that these loans were extended as part of the internal group’s operational mechanism, aimed at supporting the financial and operational needs of group entities, were temporary in nature, and had received shareholder approval. Given the nature and source of the funds, there was no legal or business obligation for PTJPSI to charge interest to its affiliated parties.

Regarding the Negative Correction on Loan Interest Expenses of IDR 8,646,476,238, PTJPSI argued that the company had ceased operational activities since 1994 due to sustained losses and significant debt obligations. The company’s steel plant was subsequently leased to investors during the period 2005–2018, and the company was classified as Non-Active, as documented in the official minutes from the Jakarta Cakung One Tax Office, before being reactivated in 2016 to participate in the Tax Amnesty Program Stage I. During this period, the company continued to incur losses, and shareholder loans totaling IDR 103.65 billion had already been recorded in the Annual Tax Return, demonstrating that the debt had long existed while the company was in a loss-making condition.

Finally, with respect to the Positive Fiscal Adjustment of IDR 8,178,179,876, PTJPSI disagreed with the correction on the grounds that it was based on an assumption of interest expenses previously corrected by the DGT, which were subsequently re-adjusted as a positive fiscal correction. PTJPSI asserted that the shareholder loan from LYS was used specifically to cover the company’s losses in accordance with the company’s actual financial condition, and was not related to investments or the acquisition of fixed assets generating income subject to final or non-final income tax. Since the interest expense correction by the DGT was not related to taxable income, the Positive Fiscal Adjustment lacked any valid basis and should therefore be annulled.

After considering all evidence and arguments from both parties, The Tax Court Panel of Judges concluded that the Positive Correction on Interest Income from Loans imposed by the DGT lacked legal basis, as the loans granted by PTJPSI to affiliated parties were temporary and aimed at supporting operational needs rather than generating profit. With regard to the Negative Correction on Interest Expenses, the Panel determined that PTJPSI was indeed in a loss-making condition and experiencing liquidity constraints, supported by the fact that the company leased its steel plant to investors during 2005–2018 and had been classified as Non-Active until participating in the Tax Amnesty Program in 2016. The shareholder loan of IDR 103.65 billion was recorded in the Annual Tax Return, confirming that the debt existed while the company was still loss-making.

Concerning the Positive Fiscal Adjustment, the Panel concluded that its calculation was unfounded, as it derived from the previously adjusted interest expense by the DGT, which was not related to income subject to final or non-final income tax. Consequently, The Tax Court Panel of Judges annulled all corrections issued by the DGT, namely: the Positive Correction on Interest Income of IDR 1,325,283,358, the Negative Correction on Loan Interest Expenses of IDR 8,646,476,238, and the Positive Fiscal Adjustment of IDR 8,178,179,876.

This ruling sets an important precedent for companies with shareholder-financed or intra-group transactions, emphasizing that interest-free loans are not automatically considered non-arm’s length provided the company can demonstrate that it is in a loss-making position, experiencing liquidity constraints, and that the loans are sourced from shareholders meeting the requirements under Government Regulation No. 94/2010. The decision also underscores the importance of maintaining comprehensive Transfer Pricing documentation based on functional analysis and actual financial conditions, making this case a strategic reference for Transfer Pricing practices and the application of the Arm’s Length Principle in Indonesia.

A comprehensive analysis and the Tax Court Decision on This Dispute Are Available Here