Royalty and licensing payments made by an Indonesian company to a non-resident recipient are generally subject to PPh 26 withholding tax at 20% of the gross amount, unless an applicable tax treaty provides a lower rate. The tax treatment depends on what rights the Indonesian company receives, whether treaty relief is available, and how the licensing agreement allocates the withholding tax cost.
What Counts as a Royalty in Indonesia?
The description used on an invoice or contract does not determine whether a payment is a royalty. The underlying rights granted to the Indonesian company determine the tax treatment.
Confirm the Indonesian tax treatment before classifying an overseas payment. Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Payments for the use of trademarks, patents, copyrights, proprietary software, technical know-how, formulas, rights or information relating to manufacturing processes, and similar intangible rights may fall within the royalty rules. A payment described as a technology fee or license fee may require different treatment if it is actually consideration for services rather than the use of intellectual property.
This becomes more complex when one contract contains both licensing and services. An Indonesian subsidiary may license software from its overseas parent while also paying for implementation, maintenance, training, or technical support. These services should not automatically be treated as part of the software royalty merely because they appear in the same agreement.
How Much PPh 26 Applies to an Overseas Royalty?
Indonesia’s domestic rate for royalties paid to a non-resident is generally 20% of the gross royalty amount. The Indonesian payer is responsible for withholding the tax from the payment.
If a PT PMA owes an overseas licensor IDR 10 billion (USD 570,000), the domestic 20% rate would produce PPh 26 of IDR 2 billion (USD 114,000). The overseas recipient would receive IDR 8 billion (USD 456,000) after Indonesian withholding tax, assuming the tax is deducted from the agreed gross royalty.
If an applicable tax treaty limits Indonesian tax on the royalty to 10% and the recipient qualifies for treaty relief, withholding on the same IDR 10 billion payment would fall to IDR 1 billion (USD 57,000).
When Can a Tax Treaty Reduce the 20% Rate?
Indonesia’s tax treaties can provide lower royalty withholding rates, but the applicable rate varies between treaties. A lower treaty rate is not available solely because the recipient is established in a treaty jurisdiction. Eligibility depends on the relevant treaty and applicable requirements concerning tax residence, beneficial ownership, and treaty abuse.
Could a tax treaty reduce the PPh 26 on your royalty payment? Ask MAP Resources Indonesia at info@mapresourcesindonesia.com
From 2026, the procedure for applying Indonesian tax treaties is governed by Minister of Finance Regulation No. 112 of 2025 (PMK 112/2025). Non-resident taxpayers claiming treaty benefits use the Form DGT framework, with the required information submitted through Indonesia’s Coretax system.
If the requirements for treaty relief are not satisfied, the Indonesian payer may have to apply the domestic PPh 26 rate.
Who Bears the Withholding Tax Under the Licensing Agreement?
The contract determines whether Indonesian withholding tax reduces the amount received by the overseas licensor or becomes an additional cost for the Indonesian company.
If the licensor must receive IDR 10 billion (USD 570,000) net of Indonesian withholding tax, a 20% withholding rate requires the payment to be grossed up to IDR 12.5 billion (USD 713,000). PPh 26 would be IDR 2.5 billion (USD 143,000), leaving the overseas licensor with the agreed IDR 10 billion.
How Do Transfer Pricing Rules Affect Related-Party Royalties?
When the overseas licensor is a related party, withholding tax and transfer pricing address different aspects of the payment. PPh 26 determines the tax withheld from the cross-border royalty, while transfer pricing rules determine whether the related-party arrangement and amount are consistent with the arm’s-length principle.
For related-party royalty reviews, email MAP Resources Indonesia at info@mapresourcesindonesia.com
A PT PMA may apply the correct PPh 26 rate but still face a transfer pricing adjustment if the royalty cannot be supported. Conversely, transfer pricing documentation supporting the royalty amount does not establish that the correct withholding tax rate or treaty treatment has been applied.
Manage Indonesian Royalty Payments with MAP Resources Indonesia
MAP Resources Indonesia can review the Indonesian tax treatment of cross-border royalty and licensing payments before they are remitted overseas. Contact MAP Resources Indonesia at info@mapresourcesindonesia.com.
