An Indonesian-resident company, including a PT PMA, is generally taxed in Indonesia on its worldwide income, including income earned from overseas customers, foreign investments, and offshore business operations.
Is Revenue from Overseas Customers Taxable in Indonesia?
Service revenue earned by an Indonesian PT PMA generally forms part of its Indonesian taxable income even when the customer is overseas and payment is made from abroad.
Earning revenue outside Indonesia? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
For example, if an Indonesian consulting company earns USD 1 million from customers outside Indonesia, the foreign location of those customers does not remove the income from the company’s Indonesian corporate tax calculation. Indonesia’s standard corporate income tax rate is 22%.
How Are Profits from a Foreign Subsidiary Taxed?
Income from a foreign subsidiary can enter the Indonesian tax calculation through an actual dividend or, where Indonesia’s Controlled Foreign Company (CFC) rules apply, through deemed dividend treatment before an actual distribution occurs.
The CFC rules apply to controlled foreign companies whose shares are not traded on a stock exchange. Direct control generally exists where an Indonesian resident taxpayer owns at least 50% of the foreign company’s paid-up shares. The rules can also apply where Indonesian resident taxpayers collectively meet the 50% threshold and through qualifying indirect ownership chains.
The deemed-dividend calculation does not capture all of the foreign company’s retained profits. It applies to specified categories of income rather than using a full-inclusion approach.
Can Foreign Dividends Be Exempt from Indonesian Tax?
Foreign dividends received by an Indonesian-resident company can qualify for an income tax exemption when the applicable investment requirements in Indonesia are satisfied.
For dividends from a foreign company whose shares are traded on a stock exchange, the amount invested or used to support other business activities in Indonesia within the prescribed period can qualify for the exemption.
Different rules apply to dividends from foreign companies whose shares are not traded on a stock exchange. The relevant threshold is linked to 30% of the foreign company’s after-tax profit. Where the amount invested in Indonesia is below the required 30%, the shortfall between that threshold and the amount actually invested is subject to Indonesian income tax.
The investment must also meet the applicable timing, permitted-investment, holding-period, and reporting requirements.
What Happens When a PT PMA Sells an Offshore Investment?
A gain realized by an Indonesian-resident company from selling shares or another investment outside Indonesia generally falls within its Indonesian taxable income unless a specific exemption applies.
Selling an offshore investment? Check the Indonesian tax position with MAP Resources Indonesia at info@mapresourcesindonesia.com
If a PT PMA sells shares in a foreign company for USD 8 million after acquiring them for USD 5 million, the USD 3 million gain can enter the company’s Indonesian income tax calculation.
Foreign investors considering an offshore disposal can also refer to MAP Resources Indonesia’s guidance on capital gains taxation.
How Is Income from an Overseas Branch Treated?
After-tax income received or earned by an Indonesian-resident company through a permanent establishment outside Indonesia can qualify for an Indonesian income tax exemption when the applicable reinvestment requirements are satisfied.
The rules require investment or use for other business activities in Indonesia within the prescribed period. For after-tax income from a foreign permanent establishment, the relevant investment threshold is 30% of the after-tax profit.
If less than 30% is invested in Indonesia, the amount invested is exempt, while the difference between 30% of after-tax profit and the amount invested is taxable. The remaining balance is not subject to Indonesian income tax under the statutory formula. If more than 30% is invested, the invested amount is exempt and the remaining after-tax profit is also not subject to Indonesian income tax.
Can Foreign Tax Paid Reduce Indonesian Corporate Tax?
When foreign-source income is taxed both overseas and in Indonesia, the Indonesian company may be able to claim a foreign tax credit under Article 24 of the Income Tax Law.
Already paid tax overseas? Email MAP Resources Indonesia at info@mapresourcesindonesia.com
The allowable credit cannot exceed the Indonesian tax attributable to the relevant foreign income. The maximum foreign tax credit is calculated separately for income from each country.
For example, assume an Indonesian company earns USD 1 million of taxable income from Country A. Applying Indonesia’s 22% corporate income tax rate would produce USD 220,000 of Indonesian corporate income tax before considering the foreign tax credit.
If Country A imposed USD 150,000 of qualifying foreign income tax, the company may be able to credit that amount against its Indonesian liability, subject to the Article 24 requirements. The remaining Indonesian tax attributable to the income would be USD 70,000.
If the qualifying foreign tax exceeds the maximum credit permitted in Indonesia, the excess does not automatically create an Indonesian tax refund.
Manage Offshore Income Tax with MAP Resources Indonesia
MAP Resources Indonesia can assess the Indonesian tax treatment of your company’s offshore income. Contact MAP Resources Indonesia at info@mapresourcesindonesia.com.
