Branch Profit Tax in Indonesia: A Guide for Foreign Businesses

When expanding business operations into Indonesia, foreign companies operating through a branch (Permanent Establishment or Bentuk Usaha Tetap/BUT) must be aware of the applicable tax regulations, including the Branch Profit Tax (BPT). This tax is imposed on the after-tax profits of a foreign business entity and can significantly impact financial planning.

Key Takeaways

• Indonesia imposes a 20% Branch Profit Tax (BPT) on the after-tax income of foreign branches.
• Tax treaty benefits can reduce the BPT rate—check the applicable treaty rate for your country.
• BPT exemption is available if all profits are reinvested in Indonesia under specific conditions.
• Compliance with tax reporting obligations is required to claim any exemptions.

Understanding the Branch Profit Tax in Indonesia

Branch profits in Indonesia are subject to the standard Corporate Income Tax (CIT) rate of 22%. However, in addition to CIT, the Indonesian government imposes a Branch Profit Tax (BPT) at a rate of 20% on net after-tax profits, regardless of whether the profits are remitted to the home country.

The BPT functions as a withholding tax (WHT) on the income repatriated by a foreign branch to its parent company abroad. This additional tax is designed to ensure that foreign businesses contribute fairly to Indonesia’s tax system.

Also read: Tax Buoyancy in Indonesia: A Key Indicator of Tax Revenue Performance

Tax Treaty Benefits and Reduced Rates

The 20% BPT rate is the default rate applied under Article 26 of Indonesia’s Income Tax Law. However, a lower rate may apply if there is a tax treaty between Indonesia and the country of the parent company. These treaties can reduce the BPT rate significantly, in some cases to as low as 10% depending on the agreement. To check the specific tax treaty rate applicable to your country, visit Indonesia’s Directorate General of Taxes website.

Also check the complete Tax Treaty Countries List

Exemption Through Reinvestment in Indonesia

To encourage reinvestment in Indonesia, the government provides a BPT exemption if all after-tax profits are reinvested within Indonesia. This exemption is outlined in Minister of Finance Regulation No. 14/PMK.03/2011 and applies when profits are reinvested in any of the following ways:

1. Equity investment in a newly established company in Indonesia, where the foreign branch acts as a founding shareholder.
2. Equity investment in an existing Indonesian company where the foreign branch becomes a shareholder.
3. Purchasing fixed assets or intangible assets used for the branch’s business operations in Indonesia.

For the exemption to apply, reinvestment must be completed by the end of the following tax year and meet additional conditions, including restrictions on selling the investment within 2–3 years.

Also read: Understanding Super Tax Deduction in Indonesia

Example Calculation of Branch Profit Tax

To illustrate, let’s take Braun GmbH, a German company with a branch in Indonesia (BUT Braun), which earned taxable income of IDR 20,500,000,000 in 2022. The tax calculation would be as follows:

1. Corporate Income Tax (CIT):
   • 22% x IDR 20,500,000,000 = IDR 4,150,000,000
   • After-tax profit: IDR 16,350,000,000
2. Branch Profit Tax (with tax treaty rate of 10%):
   • 50% of after-tax profit reinvested = IDR 8,175,000,000 (exempt from BPT)
   • Remaining 50% subject to 10% BPT = 10% x IDR 8,175,000,000
   • BPT owed = IDR 817,500,000

This tax must be settled before the annual corporate tax return is submitted.

Also read: Tax Evasion in Indonesia: Causes, Consequences, and Prevention

Compliance and Reporting Obligations

Foreign branches claiming the BPT exemption through reinvestment must submit a written report to the tax office detailing:

• The amount of taxable income reinvested
• The form of reinvestment and supporting documents
• The tax year of reinvestment

For new business investments, the branch must also declare the start of commercial production, which is verified by the Indonesian Tax Office within six months of the declaration.

Understanding and planning for Branch Profit Tax in Indonesia is crucial for foreign businesses to remain compliant and optimize their tax liabilities. For official tax treaty rates and further guidance about taxes in Indonesia, you can rely to InvestinAsia’s Indonesia tax consultant and compliance services.

Our experienced team of professionals is ready to assist you in every tax matter, such as:

• Accounting and tax reporting services in Indonesia
• Indonesia Payroll Service
• Indonesia LKPM Reporting Service
• Indonesia VAT Taxpayers Registration

Contact us now for FREE consultation and special package!

Sources:

• PWC
• Ortax
• DJP Indonesia