Do you have a company operating in Indonesia and are planning on how to best manage your profits?
This article will serve as a guide on dividend tax regulations in Indonesia. We’ll also explore some of the legal means by which you can reduce your dividend tax when operating and reporting income in Indonesia.
Overview of Dividend Tax in Indonesia
How much is the Dividend Tax in Indonesia?
Dividends are an amount of money that is paid to shareholders by the General Meeting of Shareholders based on company profits. Dividend tax rates in Indonesia are calculated based on the residency status of the person reporting the taxable income. Tax residency is broken down into two categories which have specific tax rates to take into account:
- Resident: 10%
- Non-resident: 20%
Non-residents have a lower tax rate if they are eligible for the double tax treaty agreement. Foreign Investors generally fall under this category and it is therefore important to determine what international tax laws and treaties apply to them, based on their country of Tax residency.
Determining Tax Residency
Tax residency is a determining factor for each individual’s tax reporting requirements, as it determines where you are legally required to pay taxes. In Indonesia, your tax residency is determined by the following criteria:
- You reside in Indonesia.
- You are located in Indonesia for more than 183 days out of 12 months.
- You are located in Indonesia for any amount of time during a fiscal year and intend to reside there.
If you are present in Indonesia less than 183 days out of 12 months, have a permanent home outside of Indonesia, and are a tax subject abroad, then you are considered a non-tax resident. Although these criteria concern individuals, it is also important to note that there are specific rules for corporations. To learn more, check out our guide to corporate income tax in Indonesia.
Tax Treaty Agreements in Indonesia
If you are paying taxes in Indonesia or if you are looking at potential tax exemptions, it is important to look into whether there are any applicable tax treaties. Generally speaking, tax treaties are determined between countries and allow for credits to be applied for tax already paid in one of the countries involved to prevent double taxation.
When preparing tax declarations, it is best practice to consult the Indonesian tax authorities’ list of jurisdictions with tax treaties. If a tax treaty has been established with another country in which you also have to declare income, then you may be eligible for tax relief measures, depending on specific treaty clauses.
Keep in mind that tax laws are complex and differ in every country. It is very important to ensure proper reporting of any tax paid abroad. Thorough research is necessary, as incorrect or incomplete declarations can result in hefty penalties.
To make your tax reporting process easier, consult with Emerhub’s team of tax and accounting experts in Indonesia.
Dividend tax exemptions in Indonesia
Legal solution to dividend tax reduction in Indonesia
In Indonesia, there is only one tax on dividends, which is the Dividends Withholding Tax. Withholding tax refers to an amount that is withheld from wages. There is, however, a legal way to be granted a tax exemption on dividend tax and that is through reinvestment of dividends.
In general, dividends can be either taken as a cash payout for investors or be reinvested. Reinvestment refers to the act of putting profit earned from an investment back into another investment. Indonesian Tax law does not apply withholding tax on reinvested dividends, as they are not considered direct income.
This provision for tax reduction is applied via Article 34 of Indonesian Tax law (known as Undang-Undang Pajak Penghasilan). Calculating your dues is complex and careful accounting practices must be implemented when applying for exemptions. Emerhub’s advisors can simplify your company’s tax processing needs through our Tax and Accounting service.
Low-risk investments to reduce your dividend tax
Dividend reinvestments can allow you to legally reduce your dividend tax in Indonesia. When considering the different methods, however, it is important to be aware of reinvestment risks. This refers to the fact that it is not always possible to reinvest dividend capital at the same rate as the return. Here are the lower-risk means of reinvesting dividends:
- Purchase of properties: Dividends can be reinvested in properties, as long as they are not government-subsidized (Rumah Subsidi) housing.
- Term deposits: Also known as a fixed-term investment. In Indonesia, DBS Bank provides a lucrative interest rate of up to 6% per annum, which is almost the same yield as a rental property in Jakarta. Other banks include Bank Mandiri and Bank BCA.
- Injection of paid-up capital: If you have multiple companies in Indonesia, you can re-inject dividend capital into the companies. The capital will be tax-exempt.
- Purchase of gold: Investing in gold bars and coins can protect against inflation. To be applicable for exemption, gold must be 99.9% pure.
Higher risk Investments
There are many things to consider when re-investing capital. One strategy is to use higher-risk investment instruments. These are considered high risk because they can result in higher profit returns, but can equally put the invested capital in danger of being lost. Here are the main instruments that fall into the high-risk category:
- Money Market: Stocks in publicly listed companies and Indonesian Government Bonds. Bonds are 100% protected by the Government of Indonesia and are occasionally launched. There are two types of Bonds with interest paid monthly:
- Interest floating with floor and non-tradable on the secondary market
- Fixed interest and tradeable (allowing capital gain)
- DIRE (Real Estate Investment Funds): DIRE is strictly regulated in Indonesia and it is necessary to choose those with OJK Licensed. DIRE properties that will provide recurring revenue (either dividends or rental revenues) are hotels, hospitals, malls, offices, and apartments.
- DINFRA (Infrastructure Investments Funds): Gaining dividends and capital gains from Infrastructure projects such as road and highways, mineral water infrastructure (which is closed to any private investment), Waste Management, Electricity, New Energy, and others.
It is important to keep in mind that the deadline to re-invest dividends is by the third month of the last financial year. The dividends should also be re-invested for a minimum of three years, meaning that properties not under leasehold cannot be sold before that time. Deposit terms must also be three years and Bonds cannot be traded or sold before that same time-frame.
Streamline your company’s Tax and accounting needs with Emerhub
Running business activities in Indonesia requires thorough knowledge of Tax Withholding laws, reporting deadlines, and fiscal Best Practices, all of which can be complex, especially when reporting income simultaneously in multiple countries.
With Emerhub, you can facilitate your specific tax and accounting needs. Our team of experts will help you with all your business’ payroll needs, from calculating employment tax for your employees to submitting quarterly Personal Income Tax (PIT) declarations and taking care of your annual settlements.
Contact us via the form below and we’ll put you in touch with one of our advisors.