Foreign entities often structure acquisitions of Indonesian entities so they can rely on Indonesia’s double tax treaties with, among others, Singapore, Hong Kong or the Netherlands, as governed under Directorate General of Taxation Regulation No. Per-25/PJ/2018 regarding Avoidance of Double Taxation.
Further, to encourage investment, Ministry of Finance Regulation No. 258/PMK.03/2008 regarding Article 26 Withholding on Income from the Sale or Transfer of Shares (MOF Reg. 258), stipulates that withholding tax is charged in Indonesia at 20% on dividends and at 20% on interest payments to foreign shareholders/lenders, but this can be reduced under certain double tax treaties.
Tax incentives are primarily aimed at foreign investors.
Under MOF Reg. 258, withholding tax is applicable if the transfer of shares is conducted with a company that was established in a tax haven country and has a special relationship with an Indonesian PT or permanent establishment in Indonesia.
Under Article 18(4) of the Indonesian Income Tax Law, a “special relationship” is deemed to exist where:
- A taxpayer has at least 25% capital participation, directly or indirectly, in other taxpayers, or there is such a relationship between two or more taxpayers.
- A taxpayer has control over another taxpayer or two or more taxpayers are under the same control, whether directly or indirectly.
- There is a family relationship, that is, parents, children, siblings, cousins, in-laws and step-children.
This first appeared in Private Equity in Indonesia: Market and Regulatory Overview, published by Thomson Reuters Practical Law. You can find the full chapter here.
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