Yes, depending on its activities. If it performs commercial functions or contract negotiations, it can be considered a PE.
If your foreign company is doing business in Indonesia, knowingly or not, you might be subject to taxation under what’s known as a Permanent Establishment (PE). Many businesses fall into this category without realizing it, especially when they establish a representative office, rent space, or engage agents in Indonesia. Understanding the tax obligations that come with PE status is crucial to avoiding financial and legal trouble.
A Permanent Establishment or Bentuk Usaha Tetap (BUT) is defined under Article 2 of the Income Tax Law (as amended by Law No. 7 of 2021 on Harmonization of Tax Regulations or HPP Law). It refers to a fixed place through which a non-resident individual or entity conducts part or all of its business activities in Indonesia. This includes places like branch offices, factories, construction projects, and even agents that habitually act on behalf of the foreign entity.
Unlike some jurisdictions, Indonesia doesn’t require a physical company to be established for tax purposes. If you’re carrying out business activities in Indonesia that generate income, you may already qualify as a PE.
Some of the most common forms of PE include:
PE status is determined not by formality, but by substance. If you have a long-term presence, an address, or operations in Indonesia, or you employ individuals in-country, even temporarily, you may be subject to PE taxation.
PE triggers include:
In addition to the HPP Law, Indonesia refers to international frameworks like the OECD Model Tax Convention, and its Double Tax Avoidance Agreements (DTAAs). While DTAAs can offer relief or clarification, the domestic law prevails unless treaty conditions are met and properly documented.
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A PE is treated like a resident taxpayer for income tax purposes. This means it must pay Corporate Income Tax (CIT) at a flat rate of 22% on its net profits (as of 2024, under the HPP Law). In addition, Branch Profit Tax of 20% may apply on after-tax profits remitted abroad, unless reduced under a tax treaty.
The tax base is calculated based on profits attributable to the Indonesian operation. The tax authority expects clear documentation and justification of all revenue and cost allocations.
PEs are obliged to withhold taxes when making payments to third parties, such as:
Rates vary from 2% to 20%, and failure to withhold and remit taxes results in sanctions. The Director General of Taxes details these obligations under Regulation No. PER-24/PJ/2021.
If the PE provides taxable goods or services, it must register as a PKP (Taxable Entrepreneur) and charge 11% VAT (as regulated by HPP Law). Taxpayers must file monthly VAT reports and make the payments. Late filing or payment triggers fines and interest.
The Indonesian tax authority applies the arm’s length principle to determine the profits attributable to a PE. Proper transfer pricing documentation is essential, especially if the PE transacts with related parties overseas. PMK No. 172/PMK.03/2015 governs this and outlines the transfer pricing reporting requirements.
Misattribution of profits may lead to tax reassessments and disputes. Indonesia’s tax auditors are increasingly focusing on economic substance and real value creation.
To fulfill tax obligations, a PE must:
Non-compliance may lead to tax sanctions and difficulties in remitting funds or obtaining government approvals.
Indonesia has signed DTAAs with over 70 countries. These treaties can reduce or eliminate:
To claim DTA benefits, the foreign company must submit a Certificate of Domicile (CoD) and DGT Form annually. Without this, the tax office applies domestic rates.
Failure to fulfill PE obligations can result in:
Tax non-compliance may also prevent repatriation of funds or halt operational licenses. In serious cases, the tax office may impose criminal charges.
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We often see foreign clients caught off guard by the Indonesian tax regime. Many believe they’re operating informally or below the radar, only to later face tax assessments.
Our legal and tax team at Kusuma & Partners Law Firm routinely assist:
We recommend foreign companies review their Indonesian footprint early, rather than waiting for a tax letter.
Tax obligations for Permanent Establishments in Indonesia are comprehensive, and failure to comply could be costly. Understanding when PE status applies and acting accordingly helps you stay ahead of legal risk.
Need any advice? Let us guide you in handling your PE tax obligations properly and efficiently. Contact us today for a consultation.
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“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult with us.”
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