What is the difference between becoming an Employee and a Director from China to work in Indonesia ? (Tax Treaty Indonesia – China series)

Many Chinese mainland company now has a subsidiary in Indonesia and ask their employee in China to work in Indonesia and often act as a Director even though they are just an employee.

On a tax perspective, they must consider the difference between becoming an employee and a director as stated on Tax Treaty between Indonesia and China as follows :

Article 15 – Dependent Personal Services

1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
3. the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days within any twelve month period; and
4. the remuneration is paid by, or on behalf of, an employer who is not a resident of the other Contracting State; and
5. the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other Contracting State.
6. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State shall be taxable only in that State.

Article 16 – Directors’ Fees

Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors or any other similar organ of a company which is a resident of the other Contracting State may be taxed in that other Contracting State.

As on article 15 and 16 we can conclude:

• Both may be taxed in that contracting state, it means that if the person works in Indonesia, the income may be taxed in Indonesia;
• As an employee, their income can only be taxed in China but if they work in Indonesia not more than 183 days and the employer is not from Indonesia and the employer does not have permanent establishment in Indonesia;
• An employee from China who works in a ship or aircraft operated in international traffic by an enterprise from China shall be taxable only in China;

To become director as on article 16, the director’s income may be directly taxed in Indonesia but also they must consider about the Resident that is stated on article 4 :

Article 4 – RESIDENT

1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management, place of head office or any other criterion of a similar nature.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
3. he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);
4. if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
5. if he has an habitual abode in both States or in neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
6. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the States shall settle the question by mutual agreement.

It means that if you want to become a director in Indonesia but you are still a resident of China as on article 4 above, then the income can only be taxed in China.

If you have any questions, do not hesitate to contact TBrights.

By Tommy HO – Managing Partner TBrights

TBrights is a tax consultant in Indonesia which currently is an integrated business service in Indonesia providing comprehensive tax and business services.