A foreign company can test the Indonesian market before establishing a PT PMA, but the activities it can conduct depend on the structure used. A company may establish a representative office for permitted non-commercial activities, sell through an appropriately licensed Indonesian distributor or partner, or conduct certain transactions directly from overseas. Establishing a PT PMA becomes relevant when the investor needs its own Indonesian entity to conduct licensed commercial operations.
Using a Representative Office Before Establishing a PT PMA
A foreign company that requires its own presence in Indonesia before establishing an operating subsidiary can consider a representative office. Indonesia recognizes several representative-office structures, including a general foreign company representative office (Kantor Perwakilan Perusahaan Asing, or KPPA) and a foreign trade company representative office (Kantor Perwakilan Perusahaan Perdagangan Asing, or KP3A), alongside representative offices for certain specific sectors.
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Under Indonesia’s investment licensing framework, a KPPA can act as a supervisor, liaison, or coordinator for the foreign parent and its affiliates and prepare for the establishment and development of a foreign investment company in Indonesia. A KPPA cannot derive income from Indonesian sources, conduct commercial sales or purchases of goods or services between its parent company and Indonesian parties, or participate in the management of an Indonesian company, subsidiary, or branch.
Testing Sales Through an Indonesian Distributor or Local Partner
A foreign company seeking to test actual sales can use an independent Indonesian distributor or other appropriately licensed commercial partner rather than immediately establish its own operating entity.
An Indonesian distributor cannot simply provide its corporate identity or licenses while the foreign company conducts activities for which it does not itself hold the required Indonesian authorization. The distribution agreement should reflect the actual operating arrangement, including which party purchases or imports the products, contracts with Indonesian customers, invoices local sales, and assumes the corresponding regulatory responsibilities.
Selling Directly into Indonesia from Overseas
A foreign company does not automatically need to establish a PT PMA merely because it enters a transaction with an Indonesian customer. Certain goods or services can be supplied through cross-border arrangements in which the Indonesian customer contracts directly with the overseas company.
For goods, this does not eliminate Indonesian import requirements. The transaction must still identify an importer capable of fulfilling the applicable import, customs, product, and licensing obligations. Selling the goods from overseas does not itself give the foreign supplier the rights of an Indonesian importer or distributor.
For services, Indonesian taxation can materially affect the economics of the cross-border model. Payments of Indonesian-source income to a non-resident for services, work, and activities are subject to Article 26 withholding tax at 20% of the gross amount under domestic law, unless applicable treaty treatment provides otherwise. The Directorate General of Taxes confirms that qualifying non-residents may apply the relevant tax treaty rate; otherwise, the 20% domestic Article 26 rate applies.
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For example, if an Indonesian company makes a USD 100,000 service payment subject to the domestic 20% Article 26 rate, USD 20,000 would be withheld, leaving USD 80,000 payable to the overseas service provider. The result may differ where treaty treatment applies.
The tax position changes if the foreign company’s Indonesian activities create a permanent establishment (Bentuk Usaha Tetap, or BUT). A BUT is generally taxed on its taxable income at Indonesia’s 22% corporate income tax rate. Its after-tax profits are generally subject to Article 26 branch profit tax at 20% under domestic law. The branch profit tax may not apply where the after-tax income is reinvested in Indonesia in accordance with the applicable requirements, while tax treaties can also affect the applicable treatment. The Directorate General of Taxes illustrates the domestic treatment using a 22% corporate income tax rate followed by 20% Article 26 tax on the BUT’s after-tax taxable income.
Whether a BUT arises depends on the foreign company’s activities in Indonesia and, where applicable, the provisions of the relevant tax treaty. This can become particularly important when employees or other personnel are deployed to Indonesia to perform services.
Cross-border contracting can allow certain transactions to be conducted without a PT PMA, but the tax treatment can materially affect whether that structure remains commercially viable.
Ready to establish or restructure your Indonesian presence? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Where the foreign investor needs its own Indonesian entity to hold the required business licenses and conduct the underlying commercial activities directly, establishing a PT PMA becomes the appropriate structure.
Assess Your Indonesia Market Entry Structure with MAP Resources Indonesia
MAP Resources Indonesia can assess whether a foreign company’s proposed activities can be conducted through a representative office, an Indonesian commercial partner, or whether a PT PMA and corresponding business licenses are required. Contact us today at info@mapresourcesindonesia.com.
