Tax holiday in Indonesia: An overview of tax exemptions for foreign investors
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The Indonesian government according to regulation No. 35/PMK.010/2018 established a tax holiday policy in mid-2018. It aims at making the country more attractive and easier for investors to successfully conduct business operations in Indonesia.
For foreign investors, this innovative tax system is an efficient way to minimize corporate income tax. This reduction significantly lowers the overall tax burden on foreign businesses, freeing up resources that can be used in the company’s core operations.
This article provides detailed information, including the process and requirements of the tax holiday in Indonesia for foreign businesses.
The tax holiday in Indonesia is based on Indonesian tax law and provides a reduction or exemption on income tax for a specified period of up to 5 to 10 years.
The exemption applies to companies that make capital investments in pioneer sectors such as manufacturing, tourism, and agriculture, and meet the criteria set by the Indonesian government, such as minimum investment levels.
Additionally, the Ministry of Finance (MoF) reduces a company’s corporate income tax by 50% for 5 years if the company invests between IDR 100 billion and IDR 500 billion. After that, the company gets a tax reduction of 25% for another 2 years.
Foreign investors who set up a company or joint venture in Indonesia are eligible for income tax deductions through tax-free options. This corporate tax relief greatly benefits the company as it reduces the amount of taxes owed on their income.
The tax holiday scheme is aimed at attracting foreign investment by providing investment incentives.
- Exemption from corporate income tax on the income received by the company.
- Deduction of income tax through tax-free options for taxpayers subject to corporate tax.
- Reduction of corporate income tax (CIT) depending on the investment amount.
The Indonesian government provides tax holiday incentives to various industries in the country. However, there are certain requirements to obtain this beneficial tax system.
- The industry must prioritize job creation, technological innovation, and strategic value for the nation’s economic outlook.
- Investors must pay the minimum capital requirement which is IDR 500 billion to gain a tax holiday for the investments.
Currently, only a few industries are eligible for the tax holiday in Indonesia and there is a possibility of more industries being added in the future, depending on government decisions and policies.
- Oil and gas
- Medical equipment
- Machinery components
- Digital economy
The MoF in Indonesia has provided a list of total tax allowances for the eligible industries operating in different business sectors.
- A 30% reduction in taxable income for the amount invested in tangible fixed assets, including land, with a 5% reduction each year for 6 years of commercial production of the eligible industries.
- A reduced withholding tax rate of 10% on dividends paid to non-residents, or the applicable reduced rate under a tax treaty.
- The ability to carry forward tax losses for longer than 5 years but not more than 10 years.
Note: *The 30% reduction is subject to the condition that the assets are not misused or transferred within a specified period, except if they are replaced with new assets.
The tax holiday in Indonesia is an in-demand benefit for businesses looking to establish themselves in the country. The application process for obtaining this benefit requires submission of necessary documents to relevant agencies.
The application process for the tax holiday must be completed in order to achieve a successful outcome and involves the following steps:
1. Foreign businesses must submit the required documents to Central PTSP of the Investment Coordinating Board (BKPM).
- A copy of the company’s articles of association or equivalent legal document
- Business plan
- Passport copies of the directors and shareholders
- Proof of registered address
- Information on the sources of funding
- Tax ID numbers
- Evidence of any relevant licenses or permit
2. BKPM conducts a completeness check of the submitted documents.
3. The ministry of finance makes a decision based on the submitted documents and BKPM’s assessment.
4. The ministry of finance determines the investor’s eligibility for tax exemption.
Partnering with an experienced service provider such as Emerhub, assists in understanding and managing the process of acquiring the tax holiday in Indonesia and ensuring compliance with local regulations.
In addition to the steps mentioned above, companies must also fulfill the following requirements to confirm their eligibility for the tax holiday system:
Compliance with local regulations and laws
Companies must ensure that their operations comply with all relevant Indonesian regulations and laws. They can do so by providing evidence in the form of licenses, permits, and certifications that show their operations meet the legal requirements.
Community engagement and support
Companies should demonstrate their commitment to engaging with local communities and ensuring their support for the business. It can be achieved through sustainable business practices and employee engagement.
Financial statements and performance metrics
To apply for the tax holiday a company must go through BKPM but in addition to that they also need to provide the performance metrics to the MoF. – This helps to demonstrate the company’s ability to successfully implement the investment and support its operations in Indonesia.
By partnering with Emerhub, businesses take advantage of a smooth, and efficient tax holiday application process with successful outcomes.
- Emerhub consultants offer expert assistance in simplifying the tax holiday application process.
- They provide clear guidance on necessary documents and requirements.
- Ensure that all required information is properly submitted.
- Streamline and expedite the application process.
- Allow businesses to fully benefit from the tax holiday incentives.
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