Royalty payments from an Indonesian company to an overseas intellectual property owner are generally subject to Indonesian withholding tax, although an applicable tax treaty may reduce the rate. The applicable treatment depends on whether the payment qualifies as a royalty and whether the foreign recipient meets the requirements for treaty relief.
How Indonesia Taxes Royalty Payments
Indonesia generally applies PPh 23, Indonesia’s withholding tax on certain payments to domestic taxpayers, at 15% of the gross amount of royalties paid to Indonesian corporate taxpayers.
Royalties paid to a foreign taxpayer are generally subject to PPh 26, Indonesia’s withholding tax on certain Indonesian-source income paid to non-residents, at 20% of the gross amount, unless a tax treaty provides a lower rate.
Indonesia’s tax treaties can apply different royalty rates depending on the treaty and, in some cases, the type of intellectual property involved. The Indonesian company making the payment should establish whether treaty relief is available before applying a reduced rate.
The same withholding tax framework applies differently to dividends, interest, and royalties paid from Indonesia to overseas recipients.
What Qualifies as a Royalty Payment?
Royalty payments can include consideration for the use of, or right to use, intellectual property such as trademarks, patents, designs, copyrights, formulas, processes, or other intangible assets. Whether a payment falls within this treatment depends on the rights granted under the arrangement.
Structuring an overseas royalty payment? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Payments for services or software do not automatically constitute royalties. Their treatment depends on the nature of the arrangement, the rights granted to the Indonesian customer, Indonesian tax law, and the applicable tax treaty.
Where an agreement contains both licensing and service elements, the contract and supporting records should identify what the Indonesian company is paying for and how the charges are calculated.
When Can a Tax Treaty Reduce Royalty Withholding Tax?
The rate depends on the relevant treaty. Some treaties distinguish between different categories of royalties, so there is no single treaty rate for all overseas royalty payments.
Establishing residence in a treaty jurisdiction does not by itself establish entitlement to the reduced rate. The foreign recipient must also satisfy the applicable requirements for treaty relief, including Indonesia’s anti-abuse and beneficial ownership requirements where relevant.
What Documentation Is Required for Treaty Relief?
Indonesia’s current treaty-relief procedure requires the foreign recipient to provide documentation establishing its eligibility for the treaty benefit.
Under the current Form DGT framework, eligibility extends beyond establishing tax residence. Depending on the recipient and transaction, relevant considerations can include whether the recipient conducts genuine business activities, has sufficient personnel, controls the income or underlying rights, bears relevant risks, and is acting as an agent, nominee, or conduit.
Need to determine whether treaty relief applies? Email MAP Resources Indonesia at info@mapresourcesindonesia.com
The Indonesian payer should obtain and review the required treaty documentation before applying a reduced withholding rate. If the requirements are not satisfied, the payment is generally subject to the domestic PPh 26 rate of 20%.
How Do Related-Party Royalty Payments Affect Transfer Pricing?
A reduced treaty withholding rate does not establish that the royalty amount itself is acceptable for Indonesian tax purposes.
When royalties are paid between related companies, the arrangement may also fall within Indonesia’s transfer pricing rules.
The Indonesian company may need to support the commercial basis for the royalty, the benefit received, and the method used to determine the amount. A royalty can qualify for a treaty withholding rate while still creating a transfer pricing issue if the amount or underlying arrangement cannot be supported.
How Are Royalties Different From Other Cross-Border Payments?
Royalties, interest, dividends, and service or management fees are not subject to the same Indonesian tax treatment. Their classification can affect the applicable withholding tax, treaty provision, and other Indonesian tax obligations.
Structure Royalty Payments With MAP Resources Indonesia
MAP Resources Indonesia can assist foreign investors in assessing Indonesian withholding tax, treaty eligibility, documentation, and transfer pricing requirements for cross-border royalty arrangements. Contact us at info@mapresourcesindonesia.com.
