A Permanent Establishment under the Income Tax Law is a form of business used by individuals residing outside Indonesia to conduct business activities in Indonesia. A Permanent Establishment can be identified from activities including construction activities. In determining the status of a Permanent Establishment, the OECD model and the United Nations Model have different time tests. A time test is a test to determine the significance of a person’s presence in Indonesia.
According to the OECD model time test, a permanent establishment for construction activities is 12 months in accordance with Article 5, paragraph 3 “A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.” Meanwhile, the United Nations model time test for a permanent establishment for construction activities is 6 months “The term “permanent establishment” also encompasses: (a) a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months”.
What about the time test according to the Income Tax Law?
The Income Tax Law stipulates a time limit in accordance with article 2 paragraph 5 of no more than 183 days within a 12-month period for Permanent Establishments engaged in construction activities. However, construction activities and other activities are still included in the definition of Permanent Establishments in accordance with Article 2 paragraph 5 of the Income Tax Law.
In Article 23 paragraph 1 of Minister of Finance Regulation Number 112 of 2025, which adopts Article 14 on the splitting up of contracts that have tax avoidance prevention clauses that have been signed by several countries, the time test for construction, installation, or assembly projects in Indonesia is calculated by adding up:
- The period of construction, installation, or assembly projects carried out by foreign taxpayers, and
- The period of construction, installation, or assembly projects carried out by individuals or entities closely related to foreign taxpayers at the same construction, installation, or assembly project location.
Furthermore, in paragraph 3, the construction activities carried out by closely related persons with foreign taxpayers shall be carried out within a period of more than 30 calendar days.
Overall, the time test provisions in the Income Tax Law and its implementing regulations indicate that Indonesia applies a strict and comprehensive approach in determining the Permanent Establishments status of construction activities, while strengthening efforts to prevent tax avoidance through provisions on the consolidation of project periods.
By Olina Rizki Arizal – Partner
TBrights is a tax consultant in Indonesia that is currently an Integrated Business Service in Indonesia that can provide comprehensive tax and business services.
Reference:
- The Minister of Finance Regulation Number 112 of 2025 Procedures for the Application of Double Taxation Avoidance Agreements
