Optimizing Taxes on Leasehold Property in Indonesia with a PT PMA

Did you know that structuring your leasehold property investment through a PT PMA could reduce your tax liability by as much as 70%? This approach ensures compliance with local regulations and maximizes your returns by leveraging Indonesia’s tax incentives for foreign-owned companies.

In this guide, we’ll explore how a PT PMA can help you optimize your tax strategy and help you keep more of what you earn by renting your leasehold properties.

Understanding Leasehold Property in Indonesia

Leasehold property allows you to use and manage land or buildings for a fixed period, typically 25–30 years, without transferring ownership. This arrangement particularly appeals to foreign investors, as Indonesian law restricts freehold ownership for non-citizens, making leasehold the most viable option for entering the property market.

Who Can Hold Leasehold Property?

Leasehold property can be acquired by:

• Indonesian Citizens: Individuals with full rights under local property laws.
• Foreign Nationals with a KITAS (Residency Permit): Allowing non-citizens to invest under specific conditions.
• Companies, Including PT PMAs: These are especially advantageous for foreign investors, offering full operational control and tax optimization opportunities.

Read our article for detailed information on Buying Property in Indonesia.

Taxation of Leasehold Property for Individuals

When an individual leases a property in Indonesia, their tax obligations are relatively straightforward. 

• Acquisition Costs: Leasehold agreements are treated as rentals with no additional tax benefits or expense deductions for individuals.
• Taxes on Rental Income: Residents are subject to a final income tax of 10% of the gross rental income, while non-tax residents in Indonesia are subject to a 20% tax on their rental income. 

For example, if a resident rents out a property and his annual income from that property is IDR 2 Billion, they will pay IDR 200 Million as the final tax on that rental income.

While this system is simple, individuals cannot claim deductions for leasehold costs or other operational expenses, making it less tax-efficient for businesses or large-scale operations.

Using a PT PMA for Tax Optimization for Your Leasehold Property

In comparison to investing in leasehold property as an individual, structuring your investments through a PT PMA can help you significantly reduce your tax liabilities at multiple stages from purchasing property to distributing dividends.

Let’s explore how a PT PMA can optimize taxes at each stage of your leasehold property investment.

1. Tax Optimization When Purchasing a Leasehold Property 

When a PT PMA leases a property, it must comply with the withholding tax obligation under Tax Article 4.2. That means the company needs to withhold 10% of the lease value and remit it to the Indonesian Directorate of Tax on the lessor’s behalf.

The advantage of withholding and remitting this tax is that, as long as the PT PMA continues to do so, it can treat the remaining leasehold payment as a deductible expense.

To understand it better, let’s take an example:

Imagine your PT PMA leases a property for IDR 2 billion:

1. Withholding Tax: The company withholds IDR 200 million (10%) and pays this directly to the Indonesian tax authorities.
2. Deductible Expense: The remaining IDR 1.8 billion is classified as a business expense, which reduces the company’s taxable income.

As a deductible expense, the leasehold amount after paying the withholding tax provides immediate tax savings for your company.

2. Tax Optimization When Renting Out the Leasehold Property

The ultimate goal of purchasing a leasehold property in Indonesia is to generate rental income. If you plan to do the same, a PT PMA will help you effectively reduce the taxes on the rental income through tax credits and expense deductions.

A. Rental Income Tax

As mentioned earlier, the gross rental income in Indonesia is subject to a 10% tax. However, in the case of PT PMA, this is not a cost. The amount deducted as withholding tax is credited against the PT PMA’s corporate income tax, reducing the net tax burden.

On top of that, PT PMAs enjoy preferential corporate tax rates:

• First 3 Years of Operation: PT PMAs with an annual gross turnover of less than IDR 4.8 billion are subject to a reduced tax rate of 0.5%. 
• After 3 Years: The standard 22% corporate income tax rate is imposed, but small companies with annual turnover up to IDR 50 billion qualify for a 50% discount on income derived from turnover up to IDR 4.8 billion.

B. Deductible Expenses

In addition to tax credits and preferential tax rates, PT PMAs can deduct a wide range of expenses from taxable income. These deductible expenses include but are not limited to:

• Costs that are directly or indirectly related to business activities such as rent, leasehold payments, insurance, administration, etc
• Maintenance and repair costs.
• Salaries, wages, and bonuses.
• Depreciation of tangible assets.
• Promotional and administrative expenses.

Example of Tax Savings When Renting Out a Leasehold Property as Individual VS PT PMA

To understand the tax-saving advantages of a PT PMA when leasing out a leasehold property, let’s compare its tax liabilities to those of an individual investor using the following scenario:

• Gross Rental Income: IDR 2 billion.
• Total Withholding Tax Paid (10% of Gross Rental Income): IDR 200 million.
• Deductible Expenses (Applicable only for PT PMA): IDR 1.2 billion, including the cost of leasehold property

The final tax summary would look like this: 

That means a PT PMA can reduce its tax liabilities by utilizing tax credits, deducting relevant expenses, and through preferential tax rates. 

At the same time, individual investors cannot deduct any of the expenses or even the cost of purchasing leasehold property.

You can talk to our tax advisors for more information on how you can optimize taxes and reduce tax liabilities when investing in leasehold property. 

3. Dividend Tax Optimization When Investing Through PT PMA

When operating through a PT PMA, the net profits need to be distributed as dividends after paying corporate income tax (CIT) or re-invested and are subject to withholding tax. However, these withholding taxes can be minimized or avoided entirely through reinvestment within Indonesia.

If you decide to distribute dividends, the following are withholding tax rates that apply to a PT PMA depending on the shareholder’s residency:

• Resident Shareholders: 10%
• Non-Resident Shareholders: 20%, can be reduced under double tax agreements (DTAs) with specific countries. For instance:
  • Singapore & UAE: 10% (no dividend tax in these countries).
  • Hong Kong: 5% (there is no dividend tax in Hong Kong)
  • Taiwan: 10% (there is a dividend tax in Taiwan)
• Singapore & UAE: 10% (no dividend tax in these countries).
• Hong Kong: 5% (there is no dividend tax in Hong Kong)
• Taiwan: 10% (there is a dividend tax in Taiwan)

Example: Dividend Distribution by a PT PMA Leveraging DTA

A PT PMA reports a net profit of Rp. 5,000,000,000 and plans to distribute dividends equally between two shareholders: a UAE (Freezone) entity and a Hong Kong entity.

1. UAE (Freezone) Entity – 50% Shareholding

• Dividend Allocation: Rp. 2,500,000,000
• Withholding Tax (10%): Rp. 250,000,000
• Dividend Received: Rp. 2,250,000,000

In the UAE (Freezone), there is no corporate income tax (CIT) or additional dividend tax, allowing the shareholder to retain the full distributed dividend without further tax liabilities.

2. Hong Kong Entity – 50% Shareholding

• Dividend Allocation: Rp. 2,500,000,000
• Withholding Tax (5%): Rp. 125,000,000
• Dividend Received: Rp. 2,375,000,000

Hong Kong does not impose a withholding tax on dividends. Therefore, the shareholder in Hong Kong receives the dividend without additional tax obligations, making this an efficient structure for minimizing taxes.

If the PT PMA had distributed these dividends to non-residents without considering DTA’s, the total withholding tax would have been IDR 1 Billion. However, by leveraging double tax agreements and choosing tax-efficient jurisdictions for shareholders, the only withholding tax on dividends is IDR 375,000,000, saving the shareholder IDR 650 million in taxes.

Tax Exemption for Reinvested Dividends

Dividends reinvested in Indonesia within 3 months are exempt from withholding taxes if used for:

1. Term deposits are offered by banks such as Superbank, Bank Mandiri, Bank BCA, etc. Superbank offers term deposits with interest rates of up to 7.5% per annum, this is almost the same yield of rental property in Jakarta
2. Purchasing additional properties.
3. Purchasing stocks at Publicly listed companies
4. Indonesian Government Bonds.
5. Infrastructure Funds (DINFRA).
6. Real Estate Investment Funds (DIRE).

Optimize Your Leasehold Investment in Indonesia with Emerhub

If you are looking to invest in leasehold properties in Indonesia, Emerhub’s local experts will help you ensure your investment is compliant and optimized for maximum returns.

Here’s how we help you succeed:

1. PT PMA Setup: We handle the entire process of setting up your PT PMA, enabling you to legally acquire leasehold property and unlock significant tax benefits.
2. Licensing and Compliance: Secure necessary licenses on your behalf to meet Indonesia’s regulatory obligations.
3. Tax Optimization Strategies: Our experts structure your investment to minimize taxes, maximize deductible expenses, and leverage reinvestment exemptions.
4. Long-term Partnership: Beyond the setup, we provide ongoing support for operational compliance and exploring new growth opportunities.

For more details, fill out the form below and we will put you in touch with one of our experts.