New Formula for Tax Treaty Provisions on Non-Resident Taxpayer Dividends under MoF Regulation 112/2025

Through Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) 112/2025, the government seeks to narrow opportunities for tax avoidance in cross-border dividend transactions. One of the measures introduced is the Specific Anti-Avoidance Rule (SAAR) contained in the regulation. 

This provision targets potential treaty abuse by non-resident taxpayers, particularly through schemes that artificially manipulate share ownership proportions in order to obtain preferential rates under tax treaties (double taxation avoidance agreement/DTAA). 

Many tax treaties concluded by Indonesia with partner countries in relation to dividend taxation, such as those with Japan, the Netherlands, and Singapore, adopt a two-tier rate system, commonly referred to as a split rate or dual rate mechanism. 

Under this scheme, the applicable withholding tax rate on dividend income depends heavily on the percentage of share ownership. 

Non-resident taxpayers holding portfolio ownership (below 25%) are subject to a higher rate, for example, at 15%. Conversely, substantially lower treaty rates, such as 5% or 10%, only apply where the non-resident taxpayers can demonstrate an equity participation exceeding the 25% threshold. This rate disparity creates opportunities for non-resident taxpayers to commit an artificial transaction arrangement.  

Investors whose shareholding has not yet reached the required threshold may attempt to increase their ownership artificially shortly before dividend distribution in order to enjoy the participation rate. Such temporary increases in share ownership constitute threshold manipulation, which is explicitly categorized as tax treaty abuse. 

PMK 112/2025 is aimed at closing this loophole by shifting the testing paradigm to a more comprehensive approach. The regulation no longer relies solely on legal ownership at the record date, but also requires proof of economic substance and historical duration of ownership. 

Requirements for Applying Treaty Dividend Rates 

Under Article 20 of the regulation, non-resident taxpayers seeking to benefit from the lower capital participation rate under a tax treaty must meet cumulative requirements, consisting of substance, quantity, and duration requirements. 

1. Substance Requirement 

The non-resident taxpayer must be the party that actually enjoys the economic benefit of the income (beneficial owner), and not merely an agent, nominee, or conduit company; 

2. Quantity Requirement 

The share ownership must meet the minimum percentage threshold stipulated in the relevant tax treaty (for example,≥25%); and 

3. Duration Requirement 

The shares must be owned or held for at least 365 calendar days, including the dividend payment date. 

Under these provisions, even if a resident taxpayer is substantively proven to be the beneficial owner and holds shares above the required threshold, the right to the reduced treaty rate will be denied if the threshold is achieved through a sudden increase in share ownership held for less than one year. 

Read Also: DGT Issues Procedures on Blocking, Seizure, and Auction of Shares of Tax Debtors 

Anti-Dividend Stripping 

Can the provisions of Article 20 mitigate dividend stripping schemes? In practice, the answer is yes because dividend stripping generally occurs through two main patterns: 

1. Subject Manipulation 

The transfer of ownership to an entity that has access to a more favorable tax treaty, but lacks genuine economic substance 

2. Threshold Manipulation 

A short-term increase in share ownership solely to meet the treaty threshold rate before dividends are distributed 

PMK 112/2025 mitigates both practices through two primary instruments: 

• Beneficial Owner Test, as the first filter to ensure that the dividend recipient is the party substantively entitled to the income 
• 365-Day Holding Period, as the second filter to prevent short-term ownership manipulation 

Under this approach, failure to meet either the substance or duration requirement will result in the denial of the reduced treaty rate. 

Case Study: Simulation of Tax Implications 

To understand the impact, consider the following simplified illustration: 

• Tax Treaty between Indonesia and Country X 

• 15% rate for share ownership <25% 
• 10% rate for share ownership ≥25% 

• Initial Facts 

• Company A (a non-resident taxpayer) has long held 20% shares in PT Y (Indonesia). 

• Additional Transaction 

• On 1 January 2025, Company A purchases an additional 6% shareholding, increasing its total ownership to 26%. 

• Dividend Distribution 

• PT Y distributes dividends on 1 August 2025. 

• Analysis 

Formally, on the dividend distribution date, the ownership has reached 26%, exceeding the 25% threshold. However, the additional 6% shares have only been held for seven months—less than the required 365 days. 

Because the duration requirement is not fulfilled, Company A is not entitled to the 10% treaty rate. Consequently, the entire dividend received remains subject to the 15% rate. 

Read Also: Tax Invoice Code 010 vs 070: Minor Error, Potential Tax Assessment 

Monitoring and Compliance Mechanism 

The 365-day holding period requirement provides a more objective basis for tax authorities to test claims of treaty benefits. Monitoring is carried out through several layers of mechanisms: 

1. Self-Declaration in DGT Form 

Although the DGT Form does not contain a specific column regarding the shareholding duration, when a non-resident taxpayer claims a lower treaty rate, it is legally deemed to have declared compliance with all requirements, including the 365-day holding period. 

If the claim is inconsistent with the facts, the risk of tax adjustments and sanctions may arise. 

2. Risk Analysis Based on AEOI 

Through the automatic exchange of information (AEOI) framework, the DGT can profile non-resident taxpayers receiving dividends. 

For example, if a large dividend is received by an entity with a relatively low average account balance (a pass-through entity indication), this condition may trigger further examination of the shareholding structure. 

3. Document Examination During Tax Audit 

During a tax audit, the tax authority may review documents such as articles of amendment, shareholder records, and the share register. 

These documents will be examined by tracing the timeline back 365 days from the dividend payment date. If significant ownership changes are identified within that period, the claim for a reduced treaty rate may be corrected. 

Impact on Indonesian Companies as the Tax Withholder 

The risk does not only lie with non-resident taxpayers, but also with Indonesian companies as dividend payers. As the ITA 26 withholder, Indonesian companies are responsible for the accuracy of the withholding. 

If it is later discovered that the non-resident taxpayer does not meet the holding period requirement but is granted the reduced rate, the Indonesian company may be subject to tax adjustments for the underwithheld Article 26 tax, along with administrative sanctions. 

Therefore, applying the prudence principle in verifying the eligibility of treaty claims becomes crucial before dividend payments are made. 

Scope of the Impact 

In practice, not all business actors will be significantly affected by this rule. The 365-day requirement specifically targets: 

1. Short-Term Portfolio Investors 

Parties actively trading shares across jurisdictions within short periods to exploit differences in tax rates between countries 

2. Aggressive Tax Planning 

Multinational groups that suddenly restructure ownership among affiliates shortly before dividend distribution to channel income to lower-tax entities. 

On the other hand, strategic investors or parent companies holding shares for the long term will generally not be affected. 

However, for companies planning corporate actions such as mergers and acquisitions, this rule introduces a new planning consideration. Management must take into account a one-year waiting period (cooling-off period) after an acquisition before the lower treaty dividend rate can be optimally utilized. 

Therefore, Article 20 of PMK 112/2025 is not merely an administrative adjustment, but a strengthening of the anti-tax-avoidance framework emphasizing three pillars: substance, quantity, and duration. 

For business actors, understanding these technical details is essential to maintain compliance while managing cross-border tax risks more effectively, particularly within investment structures.