Tax Benefits: Strategies for international companies to Minimize Tax Liabilities

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.

• 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.

• 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.

• 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.

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.

• Companies investing in IKN are granted a tax holiday for up to 30 years.
• For taxpayers granted facilities in the form of Corporate Income Tax (PPh Badan) reductions, exemptions are provided from withholding and collection of income tax.

The scope of the exemption is as follows:

A. Income from main activities

Exemptions are granted from withholding or collection:

• Income Tax Article 22;
• Income Tax Article 23;
• Income Tax Article 4 paragraph (2) on land and/or building rental; and
• Income Tax Article 4 paragraph (2) on construction service businesses,

with a Surat Keterangan Bebas (SKB) or exemption certificate in the form of an approval decision for the Corporate Income Tax reduction facility.

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.

• 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. However, 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 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%.
  Check other countries tax treaty here ➜ https://investinasia.id/education/tax-treaty/
• 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.