Taxation for Permanent Establishment in Indonesia

According to the Senior Economist of the Center of Reform on Economics (CORE), Indonesia would still have growth in investments for the year 2023 while most of the other countries in the world will have a slowdown. Currently, investment contributes to the second biggest share of Indonesia’s economic growth. Furthermore, Indonesia itself will be one of the top receivers of Foreign Direct Investments (FDI) in the world which means Indonesia will still have financing for its economic growth.[1] Therefore, securing foreign investment and the foreign loan sector are some of Indonesia’s top priorities for its economic resilience.

For taxation purposes, the Indonesian Government has published several tax regulations for foreign investment to keep foreigners still and more interested in investing and at the same time not be a heavy burden for foreign companies to play its role in the Indonesian economy. Indonesia also has cooperated with several countries for agreement on tax treaties. Overall, there are about 71 Tax Treaties that have been in effect according to Indonesia’s Directorate General of Tax. These treaties may include tax regulations about foreign companies that are willing to carry out business in Indonesia.

For companies who have intention to execute business in Indonesia may be categorized into two types: Permanent Establishment (PE) or as a Foreign Taxpayer. There are several characteristics that differentiate between the two that lead to different tax enforcement. Generally, these characteristics were included in Minister of Finance Regulation No. 35 Year 2019 regarding Permanent Establishment, although each tax treaties may have different provisions in specific characteristics. The main difference between PE and Foreign Taxpayers is that PE are fixed places of business through which the business of an enterprise is wholly or partly carried on in some period of time depending on each country’s tax treaties with Indonesia. Most provisions in tax treaties that stated an entity counted as PE are in article 5. For example, below is Article 5 according to the tax treaty between Indonesia and Singapore compared with a fictitious example, Singa Ltd as follows:

Article 5 Permanent Establishment Singa Ltd (Example)
Paragraph 1 Business of the enterprise is wholly or partly carried on (other country) Has closed bid agreement with Indonesian Government as main contractor
Paragraph 2(h) Construction project which exists for more than six months. Port Construction Project for 4 years long in Batam
Paragraph 5 Building-site, construction or assembly project with employee more than 183 days in 12 months period The Project having foreign workers and/or experts for 4 years

Therefore, in conclusion, according to tax treaty Indonesia-Singapore article 5 mentioned before, Singa Ltd, can be determined as a Permanent Establishment (PE).

For Singa Ltd, there are some liabilities for a Permanent Establishment to be fulfilled, including: Corporate Income Tax Return; Income Tax Return Article 21; Income Tax Article 22 on Import; Income Tax Article 23; Income Tax Article 26; Income Tax Article 4 Paragraph 2; Value Added Tax and Branch Profit Tax.

TBrights as integrated business service in Indonesia and tax consultant in Indonesia will help your company to solve your tax and business matters.




by Olina Rizki Arizal – TBrights International Tax & Transfer Pricing Partner

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