Double Taxation Agreements
Indonesia’s Double Taxation Agreements (DTAs/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 tax residents of its treaty partners. Tax exemption on 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 Certificate 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 benefit and tax is withheld at a rate of 20%.
The foreign party must first fulfil the following anti-treaty abuse tests that are applicable to all types of income generated from Indonesia:
1. The entity has relevant economic substance either in the entity’s establishment or the execution of its transaction;
2. The entity has the same legal form and economic
substance either in the entity’s establishment or the execution of its transaction;
3. The entity has its own management to conduct its business, and such management has an independent discretion;
4. The entity has sufficient assets to conduct business, other than the assets generating income from Indonesia;
5. The entity has sufficient and qualified personnel to conduct the business;
6. The entity has business activity other than receiving dividends, interest, royalties sourced from Indonesia; and
7. The purpose of the the transaction is to directly or indirectly obtain the benefit under the convention that is contrary to the object and purpose of the convention.
In addition, the foreign party must fulfil the following beneficial ownership test, if required under the relevant tax treaty when generating income in the form of dividends, interest, or royalties:
1. The entity is not acting as an agent, nominee, or conduit;
2. The entity has controlling rights or disposal rights on the income, the assets, or the rights that generate the income;
3. No more than 50% of the entity’s income is used to satisfy claims by other persons;
4. The entity bears the risk on its own assets, capital, or the liabilities; and
5. The entity has no contracts which obliges the entity to transfer the income received to residents of a third country.
The withholding tax rates applicable under tax treaties are summarised below:
1. Service fees including for technical, management and consulting services rendered
in Indonesia are subject to withholding tax at rates of 5% for Switzerland, 7.5% for Germany, 10% for India, Luxembourg, Papua New Guinea, Venezuela, and Zimbabwe, and 15% for Pakistan.
2. VAT is reciprocally exempted from the income earned on the operation of ships or aircraft in international lanes.
3. The treaty is silent concerning the branch profit tax rate. The ITO interprets this to mean that the tax rate under Indonesian Tax Law (20%) should apply.
4. Labuan offshore companies (under the Labuan Offshore Business Activity Tax Act 1990) are not entitled to the tax treaty benefits.
5. Ratified but not yet effective, pending the exchange of ratification documents.
6. A protocol amending the tax treaty has been signed, pending the ratification of the protocol and the exchange of ratification documents.
Permanent establishment time test
Certain activities may give rise to the creation of a PE if they are conducted in Indonesia for more than a certain period
of time. The following is a summary of these periods for the activities specified in the relevant tax treaties: