Beneficial Owner Status As an Indicator of Tax Treaty Misuse by Non-Resident Taxpayers

Minister of Finance Regulation (PMK) 112/2025 changes beneficial owner status in the context of tax treaty implementation.  

In the regulation, the beneficial owner status constitutes one of the indicators that a non-resident taxpayer does not misuse a tax treaty. The absence of treaty abuse is, in turn, one of the mandatory criteria for obtaining the DGT Form. 

Previously, under the Director General of Taxes (DGT) Regulation Number PER-25/PJ/2018, beneficial owner status was a primary requirement for obtaining the DGT Form, rather than a part of the anti-tax treaty abuse assessment. 

In general, there are three requirements for a non-resident taxpayer to obtain a DGT Form. First, the taxpayer must not be a Resident Tax Subject. Second, the taxpayer must be a resident of a tax treaty partner jurisdiction for tax purposes. Third, the taxpayer must not engage in tax treaty abuse. 

For reference, the DGT Form is a document used to certify that a non-resident taxpayer is a resident of a particular jurisdiction. 

No Longer a Mere Formal Requirement 

PMK 112/2025 reinforces the authority of the DGT to examine the economic substance underlying beneficial ownership claims. Therefore, beneficial owner status is no longer treated as a purely administrative formality within the DGT Form. 

This shift is expected to provide greater legal certainty and stronger legitimacy of tax auditors when making adjustments to non-resident taxpayers that fail to meet the substantive beneficial ownership criteria, even where the administrative documentation is complete. 

Requirements to Qualify as a Beneficial Owner 

To be recognized as a beneficial owner, a non-resident taxpayer must satisfy four cumulative criteria: independence from third parties, full control over the management of assets and funds, limitations on the use of income, and exposure to risk coupled with the absence of an obligation to onward transfer income. 

1. Independence from Third Parties 

The individual or entity must not act as an agent or nominee, or the entity must not function as a conduit company. 

2. Full Control over Assets and Funds 

A non-resident corporate taxpayer must have full authority to utilize funds, assets, or rights that generate income from Indonesia. 

3. Limitation on Income Utilization 

The non-resident corporate taxpayer may not use more than 50% of its income to fulfill obligations to other parties, except for employee salaries or remuneration and ordinary business expenses. 

The income is determined based on the non-resident taxpayer’s non-consolidated financial statements. 

4. Risk Exposure and Absence of Obligation to Onward Funds 

The non-resident taxpayer must bear the risks of assets, capital, or liabilities held. 

Equally important, the non-resident taxpayer must not have any written or unwritten obligation to transfer part or all of the income received from Indonesia to another party. 

All the four requirements must be satisfied cumulatively, and the DGT is authorized to assess compliance with these criteria. While the concept of beneficial ownership is not new, as it was previously regulated under PER-25/PJ/2018. 

Illustrative Case: Beneficial Ownership and Treaty Shopping Scheme 

The following example illustrates the assessment of beneficial ownership in a treaty shopping structure. 

1. Transaction Scheme (Substance of Transaction) 

PT I in Indonesia requires financing from R Ltd, located in Country X. As Country X does not have a tax treaty with Indonesia, R Ltd establishes a conduit entity, H Ltd, in Country Y, which has a tax treaty with Indonesia with an interest rate of 5%. 

The capital of H Ltd is entirely funded by R Ltd and is subsequently extended as a loan to PT I. 

2. Indicators of Treaty Abuse 

Although no written obligation exists, the following facts are identified: 

• H Ltd functions as a conduit company. 
• Cash Flow Pattern: One day after receiving interest from PT I, H Ltd consistently distributes the same amount to R Ltd in the form of dividends. 
• Primary Purpose: The scheme is established solely to benefit from the Indonesia–Country Y tax treaty rate and avoid Indonesia’s domestic withholding tax rate of 20%. 

3. Beneficial Ownership Conclusion Based on the Substance Over Form Principle 

• Failure of the Beneficial Owner Test: H Ltd is deemed to have an unwritten obligation to pass the income to another party and does not exercise full control over such income. 
• Determination of the Entitled Party: R Ltd is the party that ultimately enjoys the economic benefit (beneficial owner). However, as R Ltd is not resident in a treaty partner jurisdiction, the reduced treaty rate is denied. 
• Tax Consequence: Interest payments from PT I to H Ltd remain subject to the 20% domestic withholding tax (Income Tax Article 26). 

This case underscores that the mere establishment of an entity in a treaty partner jurisdiction does not automatically entitle the taxpayer to treaty benefits. In the absence of economic substance and where the entity merely acts as a conduit to a non-treaty jurisdiction, beneficial owner status is denied, and the domestic tax rate applies. 

PMK 112/2025 is not merely an administrative amendment but a paradigm shift from formal to a more assertive substantive examination. The beneficial owner clause under this regulation is aligned with international tax principles and complements existing treaty provisions. 

International tax rules provide general anti-abuse standards, while PMK 112/2025 elaborates their substantive application and introduces clearer administrative provisions to facilitate an objective determination of beneficial owner status. 

Beneficial Owner Self-Assessment 

With the issuance of PMK 112/2025, taxpayers are effectively compelled to conduct a more in-depth self-assessment of their cross-border transaction structures. 

Beneficial owner status can no longer be claimed based solely on administrative documentation. It requires evidence demonstrating full economic control over the income. 

The tax authority now requires concrete proof of control and competent economic substance as essential conditions for treaty entitlement. Beneficial ownership is no longer determined merely by identifying the recipient of funds, but by assessing who holds economic sovereignty over the use and enjoyment of such income. (ASP)