16 March 2020

Indonesia’s Attempt to Boost Foreign Investment Through Income Tax Exemption In Light Of P3B Agreement

A stimuli for foreign investment in Indonesia takes the form of being exempted from Income Tax Obligations – especially those investors protected under P3B agreements between states and Indonesia.

| Felicia Komala, Rininta Ayunina

For many years, Indonesia has been welcoming foreign investors and foreign entities to do business in Indonesia as an attempt to increase the country’s productivity and gross domestic product. With more businesses existing in the country, this has given benefits for the people living in Indonesia as well as increased the amount of cash that is being circulated in the economy. During an interview with Bloomberg dated 3rd Oct 2019, the President stated “They (new workers) must be given room to enter the job market. We have to revise the law and hope that more investment will create competition among companies to get better workers”.[1]

Efforts were made to stimulate the interest of foreign investors to do business in Indonesia, including simplifying the process of obtaining necessary business permits/licenses. However, this has yet materialized into a system that is proven to be easier for foreign companies, as the process of permits are still said to be “quite lengthy and tedious”. The following table illustrates the estimated time frame for a foreign company to be established in Indonesia:[2]


Step/ Process

Estimated Time (days)

Principle License and Business License from BKPM


Deed of Establishment legalized by a Public Notary

1 to 2

Legalization of the legal entity status by the Ministry of Law and Human Rights


Domicile Letter from the local district authority


Tax Identification Number and taxable entrepreneur confirmation from the tax office


Company Registration Certificate (TDP) from the agency for integrated licensing services (BPPT)


Manpower Report and Company Welfare Report from the sub-department of the Ministry of Manpower


            As establishing a new company is not the only way for foreign investment, some established business opts to expand their business through creating a representative office. This will ultimately raise the business’ revenue – when the office itself merely facilitates the operations of its main office.[3] These non-permanent establishment are highly encouraged seeing the ease of its operations, as seen from a taxation standpoint specifically one referred to as the agreement for the avoidance of double taxation with respect to taxes on income (“P3B”). The following will briefly discuss on the technicalities of this tax provision and how this ultimately can create an incentive for foreign investors to bring their business in Indonesia.


Art. 15 Income Tax

Indonesia’s Art. 15 of the Income Tax (“PPh 15”) concerns defining tax payer, the object of tax and formula pertaining to how much percentage of one’s earned income has to be given up to the government. It contains the requirement that foreign entities doing business in Indonesia must be subjected to paying income tax and is further elaborated under the Decree from the Ministry of Finance No. 634/KMK.04/1994 (“KMK 634”). Art. 2 of KMK 634 stipulates:

  1. Net income from foreign taxpayers who have trade representative offices in Indonesia is set at 1% (one percent) of the gross export value.
  2. Payment of Income Tax for taxpayers as referred to in paragraph (1) is 0.44% (forty four thousandths) of the gross export value and is final.

Evidently, the taxpayer with obligation of paying such income tax are those trade representative offices in Indonesia. However, not all trade representative offices in Indonesia is bound by this tax payment obligation – pursuant to the P3B agreements between Indonesia and respective countries. When a foreign entity belongs to a country that has a P3B agreement, only permanent established offices in Indonesia can be taxed by the Indonesian government. This is because these permanently established offices would have generated profit that originates from the Indonesian economy, instead of a mere extension of the foreign entity’s businesses.


Exemption from tax obligation 

            Instead of defining permanent establishment, P3B agreements has shifted the importance towards what could not be considered as a permanent establishment. Offices with limited capability and do not generate revenue or profit from the Indonesian economy shall not be deemed as a permanent establishment. This includes when the office is solely for the purpose of storage, maintenance of stock of the goods, and when the only activity done refers to research in the Indonesian market – which shows a preparatory or auxiliary character for the enterprise.

            However, if the entity could not prove itself to be under this classification of exemption, the tax regulation under P3B agreement also further provides a special formula that would exempt the non-permanent establishment from Art. 2(2) KMK 634. Take for example, the tariff would differ between Spain (tariff amounting to 0.37% of the gross export value), Australia (0.405%), Japan (0.352%), and India (0.37%). This shows a possibility of tax reduction.

            This is not to glorify the existence of such rule, as its application is often overlooked and these qualified entities are still receiving letter from tax officer demanding payment.[4] However, these requests are normally overturned upon the request of the non-permanent establishment after successfully elaborating that they should not have been taxed in the first place.[5] In practice, these letter of appeals can request to be exempted entirely or the amount of tax they receive was merely based on the wrong formula or percentage. [6]


Relevance to encourage foreign investment in Indonesia

            While the initial goal of P3B agreements was indeed to avoid a business entity having to pay taxes twice as they are subjects in two countries, it has now proven to be useful as to stimulate interests to invest in Indonesia. As it is a staple expectation to not be taxed twice, the further flexibility allowed by the Indonesian government towards its contracting partners shows the efforts of the Indonesian government to find a suitable environment for investments. Conclusively, the tax field might not be considered as a stimulator for foreign investment at first glance. However, seeing the image of foreign investment from a macro scale, this may very well be a determining factor for foreign entities to create job opportunities in Indonesia in order to generate profit for their main business.


[1] President Joko Widodo, quoted from interview with Bloomberg’s Editor-in-Chief, John Micklethwait when addressing the economy on foreign investment. Accessible at:

[2] Law No. 25 of 2007 regarding Investment (New Investment Law) 

[3] BKPM Regulation No. 13 of 2017

[4] Based on KMK 634, the tax office will issue letter demanding for payment when it is deemed that the representative office has the obligation to pay taxes.

[5] Tax Court Decision No. Put.71299/PP/M.VIIIB/27/2016 in which exempted the company from paying the obligated tax as such office only had the job description of conducting research and marketing of the products sold by the main office; Tax Court Decision No. Put.70624/PP/M.VIIIIB/27/2016 for similar consideration and reasons.

[6] Tax Court Decision No. Put.45353/PP/M.II/27/2013 where the demanded tax was too high seeing that the tax office miscalculated the tariff percentage to be used against the relevant company. As Japan’s P3B contains a 0.352% of the gross export value instead of 0.37% as utilized by the tax office.

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