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13.2. Thin-capitalization and other Restrictions to Interest Deduction

Indonesia no longer applies thin-capitalization legislation. The erstwhile 4:1 debt/equity ratio which applied subject to exclusions (including for banks, financial institutions) from 2016 has been repealed. New restrictions to the deduction of interest -possibly in the form of an EBITDA-based earnings stripping interest barrier- are expected to be announced in due time.

Beyond the erstwhile thin-capitalization rules, the deduction of interest in Indonesia may be limited in two ways. Firstly, as a general rule, the interest expense is tax deductible to the extent the corresponding loan was contracted for the production of taxable income. Therefore, interest on loans contracted to acquire a participation in an Indonesian company is not tax deductible since the dividends derived from such participation are exempt from tax. Secondly, the loan and interest must be at arm’s length and the tax authorities are empowered to adjust the interest income or interest expense, or reclassify debt into equity if not at market conditions or not justified by economic reasons..

Mining companies under a Contract of Work may have specific thin-capitalization rules set out in the respective contract.