The Government of Republic of Indonesia, through Directorate General of Taxation, has issued several circular letters on Notification on Applicability of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Convention) as modification of provisions of Double Taxation Avoidance Agreement (DTAA) between Indonesia and several countries. These measures were taken to eliminate double taxation with respect to the taxes covered by the DTAA without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
The details of the said circular letters are as follows:
| Country | DTTA Effective Date | Circular Letter | Convention Effective Date | Entry Into Force Date |
| Republic of Tunisia | 1 January 1994 | Circular Letter No. 7/PJ/2025 | 1 August 2020 for Indonesia and 1 November 2023 for Tunisia | In relation to taxes withheld or collected in the source country on payments to or credited by foreign tax subjects, if the event giving rise to the tax occurs on or after 1 January 2025 in Indonesia and Tunisia; and In relation to other taxes imposed in tax years beginning on or after 1 January 2026 in Indonesia and on or after 28 August 2025 in Tunisia. |
| Republic of Armenia | 1 January 2017 | Circular Letter No. 3/PJ/2025 | 1 August 2020 for Indonesia and 1 January 2024 for Armenia | In relation to taxes withheld or collected in the source country on payments to or credited by foreign tax subjects, if the event giving rise to the tax occurs on or after 1 January 2025 in Indonesia and Armenia; and In relation to other taxes imposed in tax years beginning on or after 1 January 2026 in Indonesia and on or after 28 May 2025 in Armenia. |
| Ukraine | 1 January 1999 | Circular Letter No. 4/PJ/2025 | 1 August 2020 for Indonesia and 1 December 2019 for Ukraine | In relation to taxes withheld or collected in the source country on payments to or credited by foreign tax subjects, if the event giving rise to the tax occurs on or after 1 January 2025 in Indonesia and Ukraine; and In relation to other taxes imposed in tax years beginning on or after 1 January 2026 in Indonesia and on or after 28 August 2025 in Ukraine. |
| Papua New Guinea | 1 January 2015 | Circular Letter No. 6/PJ/2025 | 1 August 2020 for Indonesia and 1 December 2023 for Papua New Guinea | In relation to taxes withheld or collected in the source country on payments to or credited by foreign tax subjects, if the event giving rise to the tax occurs on or after 1 January 2025 in Indonesia and on or after 28 November 2024 in Papua New Guinea; and In relation to other taxes imposed in tax years beginning on or after 1 January 2026 in Indonesia and on or after 28 May 2025 in Papua New Guinea. |
| Hashemite Kingdom of Jordan | 1 January 1999 | Circular Letter No. 5/PJ/2025 | 1 August 2020 for Indonesia and 1 January 2021 for Jordan | In relation to taxes withheld or collected in the source country on payments to or credited by foreign tax subjects, if the event giving rise to the tax occurs on or after 1 January 2025 in Indonesia and Jordan; and In relation to other taxes imposed in tax years beginning on or after 1 January 2026 in Indonesia and on or after 28 August 2025 in Jordan. |
As per the circular letters, certain provisions under the original DTAA(s) between Indonesia and the aforementioned countries are subject to modification or amendment through the adoption of each relevant convention. Among the provisions that are amended or modified through the adoption of the convention for each respective countries are, among others summarized in the following table:
| Countries | Adopted Provisions Under Convention | |||
| Capital Gain | Permanent Establishment | Adjusted Profit | Dual Residency | |
| Tunisia | Yes | Yes | Yes | No |
| Armenia | Yes | Yes | Yes | Yes |
| Ukraine | Yes | Yes | No | No |
| Papua New Guinea | Yes | Yes | No | Yes |
| Jordan | No | Yes | No | No |
The following are the elaboration of the provisions under the convention which are adopted by Indonesia and the relevant countries (as applicable):
Capital Gain
Capital gain provision is amended in which it is now regulated that gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property (real property) situated in that other Contracting State.
Permanent Establishment
Artificial Avoidance of Permanent Establishment Status Through Commissionnaire Arrangements and Similar Strategies
Definition of permanent establishment is amended so that now it covers a natural person or entity that acts in a Contracting State on behalf of a company and, in doing so, usually enters into contracts, or usually serve lead role which lead on the conclusion of an agreement that are routinely entered into without material modification by the company, and these contracts:
- on behalf of the company;
- for the transfer of ownership of, or for the grant of the right to use, property owned by the company or which the company has the right to use; or
- for the provision of services by the company.
Furthermore, an individual or entity acting solely or almost solely on behalf of one or more companies closely related to them is not regarded as an agent with an independent status.
Artificial Avoidance of Permanent Establishment Status Through Specific Activity Exemptions
As for the exception of permanent establishment, it is regulated that the permanent establishment shall not include:
- activity specifically set out under Article 5 (4) of the original DTAA;
- the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any activity not described in subparagraph (a);
- the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraph (a) and (b),
provided that such activity or, in the case of subparagraph (c), the overall activity of the fixed place of business, is of a preparatory or auxiliary character.
The above exception shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carried on business activities at the same place or at other places in the same Contracting State and:
- that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of Article 5 of the DTAA; or
- the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character,
provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation.
Construction Permanent Establishment
To determine the construction permanent establishment status based on the duration period, the following criteria shall be applied:
- if an enterprise of a Contracting State carries on activities in the other Contracting State at a place that constitutes a building site, construction project, installation project or other specific project, or carries on supervisory activities in connection with such a place, and these activities are carried out for more than 30 days but does not exceed the period referred to in subparagraph (a) of paragraph 3 of Article 5 of the DTAA; and
- where connected activities are carried on in that other Contracting State at the same building site, construction project, installation project, or other specific project during different periods of time, each exceeding 30 days, by one or more enterprises closely related to the first-mentioned enterprise,
these different periods of time shall be added to the aggregate period of time during which the first-mentioned enterprise has carried on activities at that a building site, construction project, installation project, or other specific project.
Dual Residency
Dual resident provision is amended in which it is now regulated that the issue of dual residency of corporate taxpayer is resolved by mutual agreement by considering the domicile of the effective management, place of incorporation, and other relevant factors. In the absence of such mutual agreement, the corporate taxpayer is not entitled to any relief or exemption from tax under the DTAA.
Adjusted Profit
In the event there is profit adjustment of an enterprise in a Contracting State, the other Contracting state shall make appropriate adjustment to the amount of profit of parties which have special relation with that enterprise.
Commentary
The issuance of these circular letters and the adoption of the Convention between Indonesia and certain other contracting states demonstrate the Indonesian government’s earnest commitment to preventing double taxation while simultaneously ensuring the absence of any loopholes that could potentially facilitate tax evasion.
For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia
general@metalaw.id
