By Andreas Adoe
Foreign Trust has been used by Indonesian residents for the international tax planning in Indonesia, but what could be the tax issues? The issues about Foreign Trust drew attention during the Tax Amnesty program when taxpayers are required to declare their assets situated in Indonesia and other countries.
What if an Indonesian resident, as an individual, decides to transfer his shares of an Indonesian company to a Foreign Trust that is set up in another country, so that the Foreign Trust will legally own the shares? Could the Indonesian resident get the treaty benefit and not subject to controlled foreign corporation (CFC) rules in Indonesia?
The concept of Trust as a legal arrangement, in which the settlor transfers the assets to a trustee that will give any benefits from the assets to the beneficiaries, is not legally acknowledged in Indonesia’s legal system since the country is based on civil law.
The term “Foreign Trust” here refers to a situation where an Indonesian resident, an individual, becomes a settlor by transferring the assets to a Foreign Trust established in another country.
There are several issues in regards to the transferred assets until the taxation of the income generated by the assets. For assets, there are different interpretations about the ownership, could the tax authority deem that the owner of the transferred assets is the settlor, the trustee or the beneficiaries?
Individual residents in Indonesia are required to report their overall assets situated in Indonesia and abroad in the disclosure of the annual income tax return. Therefore, there are questions from the taxpayers whether the assets contributed to a Foreign Trust will still be deemed as the assets owned by the individual as the Indonesian resident.
The establishment of Foreign Trust by an Indonesian resident, could be done because of valid reason as well as tax avoidance purpose. The Indonesian resident may believe that a Foreign Trust is more beneficial to manage his foreign assets though it is likely to use Foreign Trust to minimize tax liability as part of cross-border tax planning.
There are several jurisdictions where Indonesian residents are able to establish a Foreign Trust as noted in the diagram below:
|BVI Trust||Hong Kong Foreign Trust||Singapore Foreign Trust|
|Settlor residency requirement||No||No||Yes, should not be a permanent resident of Singapore|
|Beneficiary residency requirement||No||No||Yes, should not be a permanent resident of Singapore|
|Trustee residency requirement||No||No||Yes|
|Restriction on trust property||No||No||No|
The use of Foreign Trust is likely because of valid reasons since an Indonesian resident may have an asset situated abroad, e.g. property, and the Foreign Trust could be used to manage or perhaps secure the assets to avoid any inheritance issues.
On the other hand, the establishment of a Foreign Trust could be simply performed to become the owner of shares and serve as the ultimate parent company in holding company structure. It is also likely that the Foreign Trust will establish a holding company for managing the shares.
Taxpayers, as Indonesian residents, are required to report their assets located both in Indonesia nor other countries and the undeclared assets could be deemed as unreported taxable income.
The questions about the Foreign Trust had risen during Tax Amnesty since Indonesian tax authority, Directorate General of Taxes (DGT) is able to use Tax Amnesty Law to impose tax penalty for undeclared assets. The questions were mainly about the ownership of the transferred assets from the Foreign Trust and the valuation of the assets, since the declared assets had to be valued.
After Tax Amnesty, participants as well as non-participants of Tax Amnesty are still required to declare their foreign assets. Unreported asset, based on Government Regulation No. 36 of 2017 dated 6 September 2017, will be deemed as unreported income, after taken into account the debt associated to the asset, while the tax rate is based on the classification of the taxpayer stipulated in the Regulation.
The common structure for Foreign Trust in tax avoidance scheme is when the Foreign Trust becomes the ultimate parent company in the corporate structure and receives cross-border income.
In some tax treaties, the Foreign Trust may receive the treaty benefits from Indonesia but in some other treaties, the treaty benefits may not be available. The structure using Foreign Trust could be challenged in regards to beneficial ownership before the treaty benefit is granted by the Indonesian tax authority.
Another structure that may be used is when the Foreign Trust establishes a holding company that will be intermediary in the cross-border structure for Indonesia though the structure may also be challenged by the tax authority based on DGT Regulation No. PER-10/PJ/2017 (PER 10) dated 19 June 2017, as part of anti-avoidance rules in Indonesia.
Based on the current CFC Rules, a Foreign Trust established by an Indonesian resident will become a CFC for the Indonesian resident since the asset contributed to the trust will be deemed as a kind of equity according to the current CFC Rules, Ministry of Finance Regulation, No. 107/PMK.03/2017 dated 26 July 2017.
Since the asset, that could be shares, has been transferred by the Indonesian resident as a settlor, to the Foreign Trust, the taxpayer may argue that the assets are actually owned by the Foreign Trust and not the Indonesian resident as the settlor. The CFC Regulation does not provide details concerning the application of CFC rules to Foreign Trust.
The establishment of Foreign Trust by an Indonesian resident may bring some issues especially regarding the ownership of the assets transferred to the Foreign Trust since the Indonesian residents are required to declare their ownership of assets located in Indonesian and other countries otherwise there is tax penalty on the failure to declare the overall assets.
For tax planning purpose, the current CFC rules may restrict the use of Foreign Trust for tax avoidance when an Indonesian resident transfers the shares to the Foreign Trust. Deemed dividends, upon the application of CFC rules, may apply on the shares transferred despite the fact that the Indonesian resident could argue that the assets have been transferred to the Foreign Trust which eventually has owned the assets.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Andreas Adoe is tax advisor based in Indonesia. He has specialized in international taxation, cross-border and domestic tax planning as well as tax law issues in both direct and indirect taxes with around 20 years of experience. He is a licensed tax consultant and tax attorney in Indonesia. He has experience as tax advisor for multinational companies, domestic companies and also has provided advice, based on tax research, on the legal issues for Indonesia’s Ministry of Finance. He regularly writes in national publication regarding Indonesia’s tax issues. He began his career at Indonesia’s Tax Authority, and later worked as tax consultant at KPMG, tax researcher at IBFD and he is also currently lecturer of tax study at the University of Indonesia as well as researcher at the University’s Tax Center. He is a graduate of the State College of Accountancy with diploma of taxation and accounting, he has a bachelor degree in accountancy from University of Indonesia and LLM degree of International Taxation from European Tax College, Tilburg University, the Netherlands.
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