The prevention of double taxation has long been a fundamental pillar of Indonesia’s international tax policy, particularly in the context of cross-border investment, international trade, and the free movement of capital. To this end, Indonesia has concluded numerous Double Taxation Avoidance Agreements (Tax Treaty) with its treaty partners, which serve to allocate taxing rights, mitigate tax barriers, and enhance legal certainty for taxpayers engaged in cross-border transactions. However, the practical implementation of treaty benefits has raised administrative and compliance challenges, particularly with respect to ensuring that such benefits are granted exclusively to taxpayers who satisfy the applicable treaty conditions and align with the underlying intent of the treaties.
In response to these challenges, the Government of Indonesia, through the Ministry of Finance, has issued a new regulation, namely Minister of Finance Regulation No. 112 of 2025, which governs the procedures for the implementation of benefits under the Indonesia’s Tax Treaty (Regulation 112/2025).
Scope of Regulation
Regulation 112/2025 regulates the procedural framework for the application of Tax Treaty in Indonesia. It applies to: (a) Indonesian resident taxpayers deriving foreign-sourced income and (b) non-resident taxpayers deriving income from Indonesian sources. While the Income Tax Law remains the primary basis for taxation in Indonesia, the Regulation 112/2025 clarifies the conditions under which Tax Treaty provisions may override domestic law.
First, the taxpayer must qualify as a resident of a Tax Treaty partner jurisdiction for tax purposes, which must be evidenced through a valid and duly authorized Directorate General of Taxes (DGT) Form. Second, the taxpayer must fall within the personal and material scope of the relevant Tax Treaty, including compliance with beneficial ownership requirements where applicable. The taxpayer must be the party that genuinely controls and enjoys the income and must not act merely as an agent, nominee, or conduit for another person. Third, the application of treaty benefits must not constitute treaty abuse. The regulation permits the tax authority to deny treaty relief where the arrangement is inconsistent with the object and purpose of the Tax Treaty, including situations involving treaty shopping, artificial structures, or transactions where the principal purpose is to obtain treaty benefit. Finally, where treaty benefits depend on specific factual thresholds, such as minimum shareholding percentages, holding periods, or the absence of a Permanent Establishment in Indonesia, these conditions must be demonstrably satisfied based on the taxpayer’s actual economic activities rather than contractual form alone.
Types and Benefits of Tax Treaty
Regulation 112/2025 reaffirms several forms of Tax Treaty benefits, including reduced withholding tax rates, exclusive taxing rights in the state of residence, exemptions from Indonesian income tax, and treaty-specific rules on Permanent Establishment. These benefits must be applied strictly in accordance with the object and purpose of the relevant Tax Treaty. Any application of treaty benefits that exceeds or contradicts treaty intent may be denied.
Limitation on Benefits
Regulation 112/2025 sets out the limitation on benefits that determines who is entitled to enjoy treaty benefits. To qualify for the benefits, the recipient of income must meet at least one of the criteria stipulated under the Regulation 112/2025. These criteria include situations where the income recipient is an individual who is a tax resident of the treaty partner country, or a legal entity whose ownership structure demonstrates sufficient linkage to that country. For corporate recipients, this may be shown through majority ownership (more than 50%) by individual residents of the treaty partner, or where more than 50% of the entity’s income is not paid out to parties outside the scope of the applicable Tax Treaty.
In addition, treaty benefits may also be available where the income recipient is a publicly listed company, provided that more than 50% of its shares are regularly traded on a stock exchange explicitly recognized under the relevant Tax Treaty. This criterion reflects the assumption that publicly traded companies generally possess genuine economic substance and are less likely to be established solely for tax-driven purposes.
Simplified DGT Form & Change of Terminology
A non-resident taxpayer who wishes to apply a reduced withholding tax rate or obtain tax exemption under the Tax Treaty benefits must submit a Certificate of Domicile using a form prescribed by the DGT. Regulation No. 112/2025 introduces a simplified version of the DGT Form compared to the previous form regulated under Director General of Taxes Regulation No. PER-25/PJ/2018. Previously, taxpayers were required to complete seven sections, whereas the new DGT Form consists of only six sections, due to the consolidation of questions relating to the substance test and beneficial ownership (previously set out in Part VI, now combined into Part V of the form).
Part V of the form must be completed if the income recipient is a non-individual, which consist of the following information: (i) country/jurisdiction of registration or incorporation; (ii) country/jurisdiction where the place of management or control resides (iii) address of the head office; (iv) address of the branch, office, or other place of business in Indonesia (if any); (v) the non-individual has relevant economic substance either in the non-individual’s establishment or transaction itself; (vi) the non-individual has the same legal form and economic substance either in the non-individual’s establishment or the transaction itself; (vii) the non-individual has its own management to carry on the business and such management has an independent discretion; (viii) the non-individual has sufficient assets to carry on the business other than assets that generate the income from Indonesia; (ix) the non-individual has sufficient and qualified personnels to carry on the business; (x) the non-individual has business activity other than receiving dividend, interest, and/or royalty sourced from Indonesia; (xi) the purpose of the transaction is to obtain the benefit directly or indirectly under the Tax Treaty that is contrary to the object and purposes of the Tax Treaty; (xii) the non-individual is acting as an agent, nominee or conduit; (xiii) the non-individual has a controlling right or disposal right on the income or the assets or the rights that generate the income; (xiv) no more than 50% of the non-individual’s income is used to satisfy any claim by another person; (xv) the non-individual assumes risk on its own assets, liabilities or capital; (xvi) the non-individual has an obligation to transfer the income received to a resident of third country/jurisdiction.
Furthermore, the updated DGT Form under Regulation No. 112/2025 also introduces several new terms. These terminology changes are intended to align the form with internationally accepted standards. Under the new form, the terminology used includes: (i) “Double Taxation Agreement”, replacing the previously used term “Double Taxation Convention”; and (ii) “Country/Jurisdiction” for identifying the relevant tax jurisdiction, replacing the former term “Country”.
Authority of DGT to Conduct Testing
The regulation gives the DGT the authority to review whether tax treaty benefits are applied correctly and not abused. The DGT may examine withholding tax practices to ensure that reduced tax rates under a tax treaty are granted only to eligible taxpayers. Tax treaty benefits can be denied if the foreign taxpayer is not the real recipient of the income (beneficial owner) or if the structure is mainly used to avoid tax. To qualify as a beneficial owner, a foreign taxpayer must genuinely control and enjoy the income and must not merely act as an agent, nominee, or conduit. If treaty conditions are not met, the tax will be imposed based on the higher rates under domestic income tax law.
Anti-Treaty Abuse Provisions
Under Regulation 112/2025, tax treaty benefits can be denied if a structure or transaction is mainly created to reduce, avoid, or delay tax, rather than to support real business activities. This means having the right documents alone is not enough—the tax authority will look at the real purpose and substance of the arrangement.
One key focus is whether the foreign taxpayer is the real owner of the income (beneficial owner). If the income is quickly passed on to another party, or if the entity only exists to receive treaty benefits, the tax treaty may not apply. The tax authority may also use tests such as the principal purpose test, which asks whether obtaining treaty benefits was one of the main reasons for setting up the structure. In practice, this approach targets treaty shopping, the use of shell or conduit companies, and artificial arrangements involving third countries.
Dividend Provisions and Reduced Withholding Tax Rates
Dividend income paid by an Indonesian company to a foreign shareholder is generally subject to withholding tax under Indonesian law. However, a tax treaty may allow a lower withholding tax rate if certain conditions are met. Regulation 112/2025 makes clear that this lower rate is not automatic and can only be applied if the foreign company truly qualifies for treaty benefits.
To use the reduced dividend tax rate, the foreign shareholder must meet the minimum shareholding percentage stated in the tax treaty and must hold the shares for at least 365 days, including the dividend payment date. In addition, the foreign shareholder must be the real owner of the dividend income (beneficial owner). If any of these conditions are not met, the reduced treaty rate cannot be applied. In that case, the higher tax rate under the tax treaty—or in certain situations, the domestic tax rate—will apply. This rule is intended to prevent short-term shareholding structures or artificial arrangements that are created solely to obtain a lower dividend withholding tax rate.
Permanent Establishment
Regulation 112/2025 significantly strengthens Indonesia’s approach to determining Permanent Establishment status. The regulation clarifies that activities traditionally characterized as preparatory or auxiliary are not automatically excluded from Permanent Establishment determination. Instead, DJP is authorized to assess the substance, function, and economic contribution of those activities conducted in Indonesia.
Certain activities may give rise to a Permanent Establishment where they play a meaningful role in income generation, support or are closely linked to the enterprise’s core business, or constitute an integral part of the group’s overall value creation process. The focus shifts from the formal classification of activities to their commercial significance within the business model.
Furthermore, Regulation 112/2025 allows the tax authority to look at related business activities together, even if they are formally separated, when those activities are designed to avoid creating a Permanent Establishment. Arrangements using agents will also be closely reviewed, especially if the agent regularly signs contracts or plays a key role in getting contracts approved. Overall, this rule focuses on in fact what happens in reality, not just what is written in contracts, and follows international standards on preventing artificial Permanent Establishment avoidance.
Author’s Remarks
Regulation 112/2025 confirms Indonesia’s shift toward a substance-based approach in applying tax treaties. Tax treaty benefits are no longer based only on formal documents, but on real business purpose, economic activity, and value creation. Taxpayers and withholding agents should carefully review their structures and transactions to ensure they reflect genuine commercial substance and comply with treaty intent.
For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia
maser@metalaw.id
