An Overview of Indonesia’s Double Tax Avoidance Agreements

Indonesia’s large number of double tax avoidance agreements (DTAA) eliminate double taxation for businesses and consumers. Further, the DTAAs contribute to a more transparent and stringent tax environment for trade and investment.

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Indonesia has signed 71 DTAAs. These agreements ensure the elimination of double taxation on income earned from the taxpayer’s country of residence and Indonesia in the form of reduced withholding tax rates on dividends, interests, and royalties and withholding tax exemptions on services fees.

As such, the DTAAs provide a liberalized tax environment to encourage trade and investments. The agreements are also a testament to growing international cooperation between countries as they offer the tools to streamline taxation or reduce the scope of tax liability.

This is particularly relevant for Indonesia, as it aims to attract an ambitious US$49 billion in foreign investment for 2023, a 7.5 percent increase from the record-breaking year of 2022.

Countries That Have Signed DTAAs with Indonesia

A-B	C-J	K-O	P-S	T-Z
Algeria	Cambodia	Korea (North)	Pakistan	Taiwan
Armenia	Canada	Korea (South)	Papua New Guinea	Tajikistan
Australia	China	Kuwait	Philippines	Thailand
Austria	Croatia	Laos	Poland	Tunisia
Bangladesh	Czech Republic	Luxembourg	Portugal	Turkey
Belarus	Denmark	Malaysia	Qatar	Ukraine
Belgium	Egypt	Mexico	Romania	United Arab Emirates
Brunei	Finland	Mongolia	Russia	United Kingdom
Bulgaria	France	Morocco	Serbia	United States of America
	Germany	Netherlands	Seychelles	Uzbekistan
	Hong Kong	New Zealand	Singapore	Venezuela
	Hungary	Norway	Slovakia	Vietnam
	India		South Africa	Zimbabwe
	Iran		Spain
	Italy		Sri Lanka
	Japan		Sudan
	Jordan		Suriname
			Sweden
			Switzerland
			Syria

Who do DTAAs apply?

The provisions of DTAAs apply to individuals and companies who are residents of one or both contracting states. The term “persons” refers to any entity recognized as a taxpayer for tax purposes.

An individual is considered a tax resident in Indonesia if they have been present in the country for more than 183 days within a 12-month period, or if they intend to stay in Indonesia. In such cases, they will be considered domestic tax subjects. The government has clarified further the definition of ‘residing in Indonesia’ and the ‘intention to stay in Indonesia’.

For the purposes of taxation, an individual is considered to be “residing in Indonesia” if they meet the following criteria:

• They live in a place of residence in Indonesia that is under their control and can be accessed at any time, which they either own or rent and is not a place of transit;
• They have significant personal or vital interests in Indonesia; and
• They have their regular or habitual residence in Indonesia.

An ‘intention to stay in Indonesia’ needs to be substantiated with the following documents:

• A permanent stay permit;
• A limited stay visa;
• A limited stay permit; or
• Other documents support their stay of more than 183 days in Indonesia.

Claiming benefits under the DTAAs

To claim benefits under a DTAA, the applicant must present a Certificate of Domicile (CoD) to the local tax office. This document presented either in the form prescribed by Indonesia’s Directorate General of Taxes or in the form of the double tax treaty partner country, is required for a party to be entitled to the tax benefit. Without this document, the party will be subject to the normal 20 percent tax rate.

The anti-treaty abuse tests

In addition to the CoD, the applicant must fulfill the anti-treaty abuse tests, which are applicable to all income types derived from Indonesia. These include examining whether:

1. the entity has sufficient employees with expertise in accordance with its line of business;
2. the entity has business activities or activities other than receiving income from royalties, interest, and dividends sourced from Indonesia;
3. the entity has fixed and non-fixed assets to adequately conduct business other than the assets generating income from Indonesia;
4. the entity has relevant economic substance either in the entity’s establishment or the execution of its transaction; and
5. the entity has its own management team and has independent discretion to conduct transactions for the entity.

Beneficial ownership test

The DTAA applicant must also fulfill the beneficial ownership test. The intent of this rule is to assist tax authorities in counteracting financial crimes, such as money laundering and tax evasion. Under the test, authorities will examine whether:

1. the entity is not acting as an agent or nominee;
2. the entity uses no more than 50 percent of its income to fulfilling obligations to other parties;
3. the entity has the controlling rights on the assets that generate the income; and
4. the entity has no obligation to transfer the income received to residents of a third country.

Examples of taxable income covered by DTAAs

Dividends

Dividends under an Indonesian DTAA are subject to a final tax rate of between seven to 20 percent depending on the DTAA partner. Resident taxpayers are required to withhold a tax rate of 20 percent for dividend payments to taxpayers whose country of residence does not have a DTAA with Indonesia.

Interest and royalties

Income from interest or royalties is subject to a tax rate of 20 percent for non-resident corporations and individuals. Under a DTAA, the tax rate for income from interest can be reduced to between zero and 15 percent, depending on the DTAA country partner, and between 10-15 percent for royalties.

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