Dividends paid by an Indonesian company to a foreign shareholder are generally subject to 20% PPh 26 withholding tax, although an applicable tax treaty may reduce the rate.
When Can an Indonesian Company Distribute Dividends?
Dividends are generally distributed from the company’s net profits, subject to the required allocation to the statutory reserve and approval by the General Meeting of Shareholders (GMS).
Planning a dividend distribution? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Under Indonesia’s Company Law, a company must allocate part of its annual net profits to a statutory reserve until the reserve reaches at least 20% of the company’s issued and paid-up capital.
Accumulated losses or other restrictions can reduce the amount of profit available for distribution.
The corporate income tax paid by the Indonesian company is separate from the withholding tax that can arise when the remaining profits are distributed to shareholders.
How Are Dividends Paid to Foreign Shareholders Taxed?
Dividends paid by an Indonesian company to a non-resident shareholder are generally subject to PPh 26, Indonesia’s withholding tax on certain Indonesian-source income paid to non-residents, at 20% of the gross dividend.
The Indonesian company paying the dividend is responsible for applying the appropriate withholding treatment. An applicable double tax agreement can reduce the 20% rate.
When Can a Tax Treaty Reduce Dividend Withholding Tax?
The treaty rate depends on the shareholder’s jurisdiction and the terms of the relevant treaty. Some Indonesian tax treaties provide different dividend rates depending on factors such as the shareholder’s ownership percentage.
A foreign shareholder cannot obtain a lower dividend withholding tax rate merely because it is incorporated or tax resident in a treaty jurisdiction. It must satisfy the applicable requirements for treaty relief, which can include beneficial ownership, ownership thresholds, and Indonesia’s treaty anti-abuse rules.
Under the Indonesia-Singapore tax treaty, for instance, Indonesian tax on the dividend is capped at 10% of the gross amount where the beneficial owner is a company that directly owns at least 25% of the capital of the Indonesian company. The treaty provides a 15% maximum rate in other cases.
What Documentation Is Required for Treaty Relief?
Indonesia’s current treaty-relief procedure requires the foreign shareholder to provide documentation establishing eligibility for the treaty benefit.
Under the current Form DGT framework, treaty eligibility can involve more than establishing tax residence. The requirements depend on the shareholder, the transaction, and the applicable treaty. They can include beneficial ownership and Indonesia’s anti-abuse rules.
Checking treaty eligibility? Email info@mapresourcesindonesia.com
The Indonesian company should establish that the required treaty conditions and documentation are satisfied before applying a reduced withholding rate. If treaty relief is unavailable, the dividend is generally subject to the domestic PPh 26 rate of 20%.
How Are Dividends Between Indonesian Companies Taxed?
Dividends received from an Indonesian company by an Indonesian corporate taxpayer are generally excluded from taxable income. The previous requirement for the corporate shareholder to own at least 25% of the distributing company no longer applies.
The Indonesian corporate recipient also does not need to reinvest the domestic dividend to obtain this treatment.
This can be relevant to foreign-owned groups that use more than one Indonesian company before profits are ultimately distributed offshore.
How Can Financing Affect Dividend Capacity?
Indonesian tax rules can restrict the deductibility of certain borrowing costs, increasing the company’s corporate income tax liability and reducing the cash ultimately available for distribution.
Indonesia generally applies a maximum debt-to-equity ratio of 4:1 for determining deductible borrowing costs for taxpayers within the scope of the thin-capitalization rules, subject to exceptions and other applicable requirements.
Related-party financing can also create transfer pricing issues, even when the company meets the debt-to-equity limit.
How Are Dividends Different From Other Profit Repatriation Methods?
Interest, royalties, and service or management fees are subject to different Indonesian tax rules from dividends and can raise separate deductibility, withholding tax, treaty, and transfer pricing issues.
Foreign investors using several forms of profit repatriation from Indonesia should classify each payment according to the underlying transaction and determine its Indonesian tax treatment separately.
Plan Dividend Distributions With MAP Resources Indonesia
MAP Resources Indonesia can assist foreign-owned companies with dividend withholding tax, treaty eligibility, corporate tax, and the tax treatment of cross-border profit distributions. Contact us at info@mapresourcesindonesia.com.
