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Will the Tax Sparing Provision Hinder the Granting of the Tax Holiday?

Indonesia

To attract investors to Indonesia, the Minister of Finance recently issued a regulation providing income tax incentives for new capital investments in pioneering industrial sectors:

a) Corporate income tax holiday for five to 10 years after the start of commercial production.
b) 50% income tax reduction for two years after the end of the tax holiday period
c) A maximum income tax rate of ten percent (10%) on dividends.

To benefit from these tax facilities, new investors should submit an application form to the Minister of Industry or to the Head of the Investment Coordinating Board. Taxand Indonesia discusses the tax facilities available and how multinationals wishing to invest in Indonesia could benefit.

Tax Incentives
General requirements are as follows:

  • New investments with minimum capital investment of IDR 1 trillion in pioneer industries such as:
    a) base metal industry
    b) oil refinery and base organic chemical produced from oil and natural gas
    c) machinery
    d) renewable energy
    e) telecommunication equipment
  • Have a legal entity status legalised by the Minister of Law and Human Rights.
  • Must deposit a minimum of ten percent (10%) of the total capital investment in a bank in Indonesia
  • There must be a tax sparing rule in the country of the investor

The application for the tax incentive for new investment must be submitted along with the following:

  • Photocopy of the Taxpayer Identification Number
  • Approval from the Investment Coordinating Board for the new capital investment
  • A statement of capacity to deposit the 10% investment fund in a bank in Indonesia (after the investment's application has been approved)
  • Approval of status as an Indonesian legal entity from the Minister of Law and Human Rights
  • A statement that there is a tax sparing rule in the investor's home country
  • The application form must be submitted with the following information:
    a) The availability of infrastructure in the investment location
    b) The domestic employment plan
    c) Evaluation of the pioneer industry requirement assessment
    d) The plan for the transfer of technology.

The application for the income tax incentive will be reviewed by a verification team and the applicant will be asked to conduct a presentation of its investment plan. Only applications that pass the verification team's assessment will be recommended to the Minister of Finance for approval.

Once the application for tax incentive has been approved by the Minister of Finance, the company will be required to submit a semi-annual report on:

  • the realisation of its commercial production
  • the realisation of the facility utilisation
  • the realisation of the domestic employment plan
  • the realisation of the transfer of technology plan

Taxand's Take


The tax holiday is considered to be a necessary to boost the country's economic development, as well as attracting new investments into Indonesia. Based on the Minister of Finance's regulation, the tax facilities that will be granted to new investors are limited in the form of corporate income tax exemption, corporate income tax reduction, and a maximum of 10% income tax rate on dividend.

One of the requirements to be granted the tax incentive is that there should be a tax sparing rule in the home country of the investor. This tax sparing rule requirement should be taken into consideration by potential investors since there are many countries that do not have a tax sparing rule.

Your Taxand contact for further queries is:
Suryohadi Djulianto
T. +62 021 8356363
E. suryohadi@pbtaxand.com

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Taxand's Take Author