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Income Tax Exemption for Branch Profit Tax
The after-tax profit of a permanent establishment (PE) is subject to 20% tax, or the tax rate specified in the relevant double tax treaty, even if not remitted to the head office, unless such profit is reinvested in Indonesia in the form of one of the types of investment stipulated in a Minister of Finance Regulation.
The previous Minister of Finance Regulation stated that a PE's after-tax profit can be exempted from income tax, if:
- the PE's entire after-tax profit is reinvested in Indonesia in the form of an equity participation; and the investment is made in a newly established company that is domiciled in Indonesia, as a founder or founding participant.
Taxand Indonesia examines the details and impact of the new Regulation on PEs operating in Indonesia.
New Tax Regulation
In the recently issued Regulation, applicable since 24 January 2011, the reinvestment opportunities for the after-tax profits of PEs have been expanded to include the following:
a. an equity participation in a newly established company that is domiciled in Indonesia as a founder or founding participant; or
b. as a shareholder in a company that is already established; or
c. the purchase of fixed assets used by the PE; or
d. investment in intangible assets to run the PE's business.
The general requirements to qualify for the exemption are as follows:
a. all PEs must send a written notice to the District Tax Office where the PE is domiciled explaining the type of investment and the actual investment made;
b. the written notice must be accompanied by tax returns for the tax year in which the income is earned or accrued;
c. in case of reinvestment in a newly established company, the new company should be domiciled in Indonesia and must have conducted business for no longer than one year since its establishment.
PEs must also fulfil the following specific requirements (depending on the form of reinvestment chosen):
a. in the case of all forms of reinvestment, the reinvestment may be made in the year in which the profit was earned, or in the following year;
b. a notice should be sent regarding the commencement of commercial production (of goods in the case of manufacturing companies or the commencement of the sale of goods or provision of services, in the case of other companies) where the after-tax profit is reinvested in a participation in the equity of a newly established company;
c. where the after-tax profit is reinvested in a participation in the equity of a newly established company, the PE cannot transfer the participation for at least two years after the commencement of commercial production by the new company;
d. where the PE reinvests in the equity of a company that has already been established and is domiciled in Indonesia, and such equity participation cannot be transferred for at least three years;
e. a PE that invests its after-tax profit in Indonesia in fixed assets and intangible assets cannot transfer such assets for at least three years.
The new Minister of Finance Regulation offers PEs an option when deciding on their investments in Indonesia in accordance with their development plans. The Regulation also provides more legal certainty and flexibility when determining when investments will be made.
However, if a PE fails to meet one of the requirements, the after-tax profit earned by it will become liable to tax. The provisions of the Regulation have been effective since 24 January 2011.
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