A permanent establishment is a non-resident tax subject treated as an Indonesianresident tax subject. A permanent establishment’s head office administrative cost is an allowable deduction for the purpose of calculating its taxable income. However, such cost should be comparable with the principal’s overall operations and evidenced by the principal’s audited consolidated financial report on its overall operations. The taxable income of permanent establishment is subject to the same tax rates as the taxable income of an Indonesian-resident tax subject.
A permanent establishment’s taxable income, after deduction of income tax payable, is subject to final withholding tax at the rate of 20% or any reduced rate under any applicable tax treaty, except if that income is re-invested in Indonesia. Such investment:
- must be in the form of equity participation (either as founders or co-founders) in companies established and domiciled in Indonesia;
- must be made in the current tax year or, at the latest, the year subsequent to the tax year in which the income is received or earned; and
- May not be transferred for at least two years after the investing company starts its commercial production.
- The above conditions are cumulative, and failure to meet any of them will result in loss of the exemption.
Revaluation of Fixed Assets
Resident corporate taxpayers may revalue fixed assets located in Indonesia with the following requirements:
- There is no outstanding tax obligation until the end of the fiscal period prior to the revaluation;
- The fixed assets to be revalued (which include land, buildings and non-buildings) are not intended for sale or transfer; and
- Revaluation is based on the market value or fair value of the asset at the time of valuation (‘new value’), which must be performed by an appraisal company accredited by the government.
Revaluation may be undertaken on a selective basis, and there is no minimum holding requirement before an asset can be revalued. The difference between the new value and the book value must first be offset with the fiscal loss of the current year and accumulated fiscal losses of the preceding years. Any excess thereof is taxed with 10% final tax. If the taxpayer undertakes merger, consolidation, or business enlargement, payment of that final tax may be spread over a period of five years, with annual payments of at least 20% of the amount of tax payable. Assets revalued may not be transferred for at least five years after the revaluation, violation of which is subject to additional final tax of 15%.
To create a better investment environment and to foster the economy in general, the government absorbs the income tax of certain business entity (resident) taxpayers dealing with certain industries.
The criteria for obtaining a tax holiday are as detailed below. The recipient must be a newly established company investing in one of 20 pioneering industrial sectors listed in the attachment of the Presidential Decree. However, a tax holiday is not available to companies that already enjoy tax facilities available for investment in certain business sectors and/or stipulated areas (including Integrated Economic Development Area; see the text below), such as accelerated depreciation of fixed assets and carrying-forward of loss up to 10 years .
The basic period of a tax holiday is a maximum of three years for companies located in the islands of Java and Bali and five years for those located outside Java and Bali. In addition, a period of one year can be added for those fulfilling each of the following criteria, i.e. employing at least 2,000 Indonesian workers, having at least 20% of the shareholding held by a co-operative, or realizing investment (other than in land and buildings) of at least US $200 million.
The decision to grant a tax holiday is made by the Minister of Investment /Chairman of Investment Coordinating Board [BKPM) for companies established within the framework of foreign/domestic investment and by the Minister of Finance for other companies. The tax holiday starts with the completion of project development (which should be no later than five years from the date of investment approval or the granting of operating license). If the company completes development in less than five years, the tax holiday period may be added with the period being saved and, if the completion takes more than five years, the tax holiday period will be reduced by any extended period needed for the completion of the development.
Integrated Economic Development Area
To enhance the development of certain areas in Indonesia (mostly those located in East Indonesia), the government has granted special income tax and custom duty treatment to such areas, and declared the area as an Integrated Economic Development Area [KAPET]. The following are the current Integrated Economic Development Areas : [i] Batui, Batulicin, Betano, Natabora, and Viqueque in East Timor ; [ii] Biak, Bima, Bintan, and Karimun ; [iii] Buton, Kolaka, and Kendari ; [iv] Kahayan, Kapuas, and Barito ; [v] Manado in Bitung ; [vi] Mbay; [ii] Natuna ; [viii] Pare-pare ; [ix] Sabang ; [x] Samarinda ; [xi] Sanga-sanga, Muara Jawa, and Balikpapan ;[xii] Sangau ; and [xiii] Seram.
Approved taxpayers doing business in those areas are entitled to the following tax facilities:
Exemption from withholding tax under article 22 of the Income tax law in respect of importation capital goods and other equipment directly related to production activities;
- Accelerated fiscal depreciation and amortization, i .e. 50% reduction of the normal useful life of the depreciated/amortized goods and 50% reduction of the normal depreciation/amortization rate;
- Extension of loss carried forward for up to 10 years (normally five years);
- 50% reduction of article 26 withholding tax on dividends; and
- Deduction of benefit in kind and other costs incurred in relation to development of the region.
Representative Offices. A representative office of a foreign company is treated as a permanent establishment in Indonesia (except if the principal is domiciled in a country having a double-taxation treaty with Indonesia), and it must register as a taxpayer in the country. In general, a representative office acts as a:
- Selling agent and/or manufacturing agent to conduct promotion, research, and supervision of goods that are produced by its principal, but it cannot trade; or
- Buying agent to conduct market research for and to conclude purchase contracts on behalf of its principal.
Although no income is generated, the representative office is required to submit tax returns for employee tax withholding purposes.
Partnerships. Partnerships are taxed on their taxable income as are other organizations. However, distributions of profits by a partnership are subject to neither withholding tax nor income tax in the hands of partners, as the income is not a tax object.
Mutual Funds. Mutual Funds (Reksa Dana) in Indonesia are regulated under the Law on Capital Markets. A mutual fund is a vehicle used to collect funds from public investors to be invested in a securities portfolio managed by an investment manager. Corporate funds are treated as companies for tax purposes.
Pension Funds. Excluded from tax is income received or occurring in a pension fund approved by the Minister of Finance, whether paid by the employer or employee, and income of a pension fund from capital invested in the form of:
- Interest on and discounts of deposits, deposit certificates and savings in banks in Indonesia and Bank Indonesia certificates;
- Interest on bonds traded on the Indonesian capital market; and
- Dividends from shares of companies listed on stock exchanges in Indonesia.