Tax Benefits: Strategies for international companies to Minimize Tax Liabilities
Plans for companies to minimise tax by starting a company in Indonesia. To help international companies minimize tax liabilities while leveraging Indonesia's favorable investment policies, tax incentives, and growing market potential. Establishing a company in Indonesia enables the optimizing production and financial flows, and utilizing Indonesia's tax treaty.
Setup a foreign owned company in Indonesia
Follow these core steps to establish your legal entity and lay the groundwork for optimal tax benefits.
Company Registration
Register a company in Indonesia as a PT PMA (Penanaman Modal Asing or Foreign Direct Investment Company). Ensure compliance with Indonesia's minimum investment requirement (IDR 10 billion for total investment)
Ownership Structure
Utilize a local director structure if needed, ensuring that Indonesian shareholders (if applicable) are not directly affiliated with the parent company to minimize tax exposure. Majority ownership by foreign shareholders is permitted under Indonesian law for most industries.
Business Structure & Industry
Set up the company as a production, trading, or marketing hub. Choose the appropriate KBLI code (Indonesian Standard Industrial Classification) for business activities to align with local licensing requirements.
Open Bank Accounts
Open Indonesian corporate bank accounts to handle transactions between the Indonesian entity, suppliers, and end customers.
Optimize Production and Sales Flow
Import Goods or Relocate Production
Option 1: Import goods from to Indonesia for local distribution or export to other countries. Option 2: Relocate production to Indonesia to take advantage of lower labor costs and potential tax incentives for manufacturing.
Distribute Goods via the Indonesian Entity
The Indonesian entity acts as the distributor or exporter, handling sales and invoicing to end customers in Indonesia or globally. Revenue is generated and retained in Indonesia, reducing tax exposure in China.
Retain Profits in Indonesia
Profits from sales remain in Indonesia, subject to local corporate income tax (22%). Reinvest retained earnings into the Indonesian entity to benefit from further tax incentives.
BATAM (Free Trade Zone)
Investors and business operators will benefit from exemptions on export and import duties, VAT (Value Added Tax), and Sales Tax on Luxury Goods (PPnBM). In addition, there are government-provided incentives for business operators and investors within the Batam FTZ.
Tax Holiday In IKN (Ibu Kota Nusantara)
- Companies investing in IKN are granted a tax holiday for up to 30 years.
- For taxpayers granted Corporate Income Tax (PPh Badan) reductions, exemptions are provided from withholding and collection of income tax.
A. Income from main activities
Exemptions are granted from withholding or collection: Income Tax Article 22; Article 23; Article 4 paragraph (2) on land and/or building rental; and construction service businesses, with a Surat Keterangan Bebas (SKB).
B. Purchases or imports related to main activities
This exemption is granted based on the approval decision for the Corporate Income Tax reduction facility as SKB.
Tax and Dividend Flow
Corporate Taxation in Indonesia
The Indonesian entity pays corporate income tax on its profits, which is subject to 22%. However, for companies with annual revenue below IDR 4.8 billion, a 50% reduction applies, resulting in a corporate tax rate of 11%. This tax reduction also applies for companies with annual revenue under IDR 50 billion only for the portion of IDR 4.8 billion of the revenue. If the annual revenue exceeds IDR 50 billion, companies are not granted this tax rate reduction.
Tax incentives may apply for investments in certain industries or regions (e.g., Special Economic Zones).
Dividend Distribution
Dividend Tax for Foreign Shareholders: Dividends distributed to foreign shareholders are subject to 20% withholding tax under Article 26 of Indonesian Income Tax Law. If a tax treaty applies, the withholding tax rate will be lower, following the specific rate agreed upon in the Tax Treaty between countries. For example, In accordance China Company, the tax rate of dividend from either portfolio or substantial holding is 10%.
Dividend Tax for Indonesian Corporate Shareholders: Dividends distributed to Indonesian company shareholders are not subject to income tax.
Dividend Tax for Indonesian Individual Shareholders: Dividends distributed to Indonesian individual shareholders are subject to a 10% withholding tax under Article 17 of Income Tax Law. If the shareholders reinvest the dividends for a minimum period of 3 years, it would be exempted from taxable income.
Key Considerations
Compliance with Indonesian Regulations
Ensure the Indonesian entity adheres to local tax, labor, and environmental regulations. Properly document and adhere to transfer pricing rules for transactions between the Indonesian entity and parent company.
Substance Requirements
The Indonesian entity must demonstrate economic substance (e.g., local employees, office space, or production facilities) to avoid being classified as a shell company.
Utilizing Tax Treaties
Leverage the China-Indonesia DTA to reduce withholding tax on dividends, royalties, and management fees.
Special Economic Zones (SEZs)
Consider setting up operations in Indonesia’s SEZs to benefit from reduced taxes, duty exemptions, and other incentives.
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Frequently Asked Questions
Everything you need to know about our services and living in Indonesia.
Foreigners may not do business with their own name in Indonesia. So, in order to do business in Indonesia, they need a partner to set up a company.
Once the foreigners have at least 1 partner and decide their business, they can register their company with just their passports.
Since G20 2022, Indonesia has relaxed and allow foreigners to have full ownership of many businesses so there will be no issue with Indonesian partners.
To live in Indonesia, there are several ways. The two most favourites are by having an Investor KITAS or with a second home visa. We can assist you in applying for both.
Each of the permits have different requirements, if you are an investor of a company, you need to only show the company bank account balance.
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