As of today, Indonesia has entered into 71 international agreements to prevent double taxation. For foreign citizens who wish to start a business, trade, or invest in Indonesia, these agreements help create more favorable conditions for business activities. Let’s take a closer look at what these tax treaties entail.
A double taxation avoidance agreement (DTAA) is a treaty between countries that regulates the issue of taxing the same income more than once. This is relevant for individuals and organizations engaged in international economic activities. In Indonesia, such tax treaties provide tax benefits, including:
• Reduced tax rates on dividends, interest, royalties, and branch profits
• Exemption from taxes on remuneration for services received by tax residents of partner countries under these treaties.
Individuals and organizations that are taxpayers in partner countries under the agreements are subject to the double taxation avoidance conventions. To be recognized as a tax resident in Indonesia, an individual must spend more than 183 days in the country per year or plan a long-term stay. This qualifies them as primary taxpayers in Indonesia. The terms "residence" and "intention to reside" in Indonesia are detailed in local legislation. An individual is recognized as a tax resident of Indonesia under certain conditions:
• Availability of permanent housing at their disposal, which they either own or rent, and which is not a temporary shelter
• The presence of significant personal or economic ties to Indonesia
Running a business in Indonesia and paying taxes is impossible without obtaining an individual taxpayer number (NPWP).
Exemption from tax on remuneration for services is usually granted only if the foreign party receiving income does not have a permanent establishment (PE) in Indonesia. To qualify for tax benefits, the foreign party must at least provide the tax authorities with a Certificate of Domicile (CoD) through the Indonesian party paying the income. Without this document, either in the form prescribed by the DGT or the form from the partner country (under certain conditions), the party is not eligible for tax benefits, and tax is withheld at a rate of 20%.
To meet CoD requirements, companies receiving income in Indonesia must satisfy the following criteria:
1. Staff composition — The presence of qualified employees in numbers appropriate to the business's area of activity
2. Type of activity — Business operations that are not limited solely to generating passive income, such as royalties, interest, and dividends from Indonesia
3. Business assets — The company must have various assets, excluding those that generate profits from Indonesia
4. Economic essence — From its inception and throughout its operations, the company must have a clearly defined economic purpose
5. Management — The organization must have management capable of independently making decisions and conducting activities on behalf of the company
Additionally, when receiving income in the form of dividends, interest, or royalties, the foreign party must meet the following beneficial ownership criteria, if required under the tax treaty:
• The organization does not act as an agent or nominee
• The organization has the rights to manage the income or assets that generate the income
• No more than 50% of the organization’s income is used to satisfy the claims of other persons
• The organization bears the risk related to its own assets, capital, or obligations
• The organization has no agreements obliging it to transfer the income received to residents of a third country
Under bilateral agreements (DTAA), Indonesia taxes dividends at rates ranging from 7% to 20%. If the recipient country does not have a tax treaty with Indonesia, the rate is 20%. Taxpayers who are residents are required to withhold this tax when paying dividends.
Corporations and individual entrepreneurs who are not residents of Indonesia pay a 20% tax on income from interest and royalty payments. However, international treaties can reduce the tax to 0–15% for interest and 10–15% for royalties, depending on the terms agreed with specific countries.
Thus, tax agreements play a key role in optimizing the tax burden for investors and companies operating both inside and outside the country. If you are interested in expanding or opening your business in Bali or other regions of Indonesia, you can contact Good Luck Group for consulting services to quickly resolve any questions or objectives. Visit our services page to learn more about the benefits we offer.
