Indonesia’s tax treaties provide for tax benefits in the form of withholding tax exemptions for service fees and for reduced withholding tax rates on dividends, interest, royalties, and branch profits received by residents of a country with which Indonesia has signed a tax treaty. Tax exemption on the service fees is typically granted only if the foreign party earning the income does not have a PE in Indonesia.
To claim the reduced rates, the foreign party must, at a minimum, present its Certifcate of Domicile (CoD) to the ITO through the Indonesian party paying the income. Without this document, either in the form prescribed by the DGT or in the form of the treaty partner country (subject to certain conditions), the party is not entitled to the tax beneft and tax is withheld at a rate of 20%.
For interest, dividends, and royalties, usually only the benefcial owner is acknowledged as the party entitled to the tax treaty benefts. The benefcial ownership requirement
is only applied to foreign taxpayers’ income if the relevant tax treaty refers to benefcial ownership. In order to be the “benefcial owner”, the following criteria should be satisfed:
- For individuals, that they are not receiving income as an agent or a nominee.
- An institution that is explicitly named in the tax treaty or one that has been agreed to by the Competent Authority in Indonesia and its treaty country partner.
- An offshore company which earns income through a custodian from share or bond transactions made onthe Indonesian Stock Exchange (except interest and dividends), that is not an agent or a nominee.
- A company whose shares are listed on the stock exchange and traded regularly.
- A bank, or
- Any other company which meets the following requirements:
- the establishment of the company in the tax treaty partner country and the way the transaction is structured/undertaken are not merely done to enjoy tax treaty benefts, the business activities are managed by the company’s own management which has suffcient authority to carry out transactions.
- the company has employee(s).
- the company has activities or an active business.
- income derived from Indonesia is taxable in the recipient’s country.
- the company does not use more than 50% of its total income to fullfl its obligations to other parties, such as interest, royalty, or other payments.