Investors looking at Indonesia will find various incentives designed to make the business environment more attractive. One of the most significant is tax allowance, a corporate tax reduction aimed at promoting investment in priority sectors and regions. This article explains tax allowance in Indonesia, its benefits, and how businesses can qualify for it.
What is Tax Allowance?
In simple terms, tax allowance is a tax incentive that provides companies with a corporate income tax reduction. The Indonesian government grants this benefit to businesses investing in specific industries and regions deemed essential for economic growth.
This incentive differs from tax holidays, which offer complete tax exemptions for a set period. Instead, tax allowance allows companies to enjoy a partial reduction in corporate income tax liabilities over several years.
Also read: Indonesia’s Sales Tax: A Guide for Businesses and Investors
Types of Tax Allowances in Indonesia
Tax Allowance for Certain Business Sectors and Regions
Under Government Regulation No. 78 of 2019 (PP 78/2019), tax allowance is granted to companies operating in priority sectors or specific regions. Businesses in agriculture, mining, real estate, and the textile and garment industry are among those eligible. Companies investing in these sectors may receive:
- A 30% reduction in net taxable income, applied at 5% per year over six years.
- Accelerated depreciation and amortization for fixed and intangible assets.
- A 10% withholding tax (WHT) on dividends paid to foreign taxpayers (or a lower rate if a tax treaty applies).
- Extended fiscal loss compensation, up to 10 years instead of the usual five.
Also read: Withholding Tax in Indonesia: Complete Guide for Foreigners
To qualify, businesses must:
- Make a high-value investment or focus on export-oriented production.
- Employ a large workforce.
- Utilize local raw materials.
Also read: Understanding Super Tax Deduction in Indonesia
Investment Allowance for Labor-Intensive Industries
Businesses in labor-intensive industries are eligible for additional tax incentives under Minister of Finance Regulation No. 16/PMK.010/2020 (PMK 16/2020). These companies receive:
- 60% reduction in net taxable income over six years.
- The requirement to employ at least 300 Indonesian workers.
This policy aims to encourage companies to create more jobs while supporting sectors like manufacturing, construction, and processing industries.
Tax Allowance in Special Economic Zones (KEK)
Companies investing in Special Economic Zones (KEK) benefit from targeted tax incentives under Government Regulation No. 40 of 2021. Businesses operating in KEK receive:
- A 30% reduction in net taxable income over six years.
- Accelerated depreciation and amortization.
- 10% withholding tax on dividends paid to foreign entities.
- Loss compensation for up to 10 years.
This incentive makes KEK an attractive destination for foreign investors seeking a tax-efficient business environment.
How to Calculate Tax Allowance?
The tax allowance formula follows the percentage-based deduction on taxable income. For example, if a company invests IDR 100 billion in an eligible sector, it can deduct 30% (IDR 30 billion) from its taxable income, applying 5% per year for six years.
Also read: LKPM Reporting for PMA / Foreign Companies in Indonesia
Comparing Tax Allowance and Tax Holiday
| Feature | Tax Allowance | Tax Holiday |
|---|---|---|
| Duration | 6–10 years | Up to 20 years |
| Reduction Type | Partial (30–60%) | Full tax exemption |
| Industries Covered | Wider range (e.g., textile, agriculture) | Capital-intensive industries (e.g., oil refining, renewables) |
| Focus | Regional and sector-specific investment | Pioneer industries with high capital input |
Also read: Tax Holiday in Indonesia: A Comprehensive Guide for Foreign Investors
Conclusion: Why Tax Allowance Matters for Investors
Indonesia’s tax allowance scheme is a strategic tool for attracting foreign direct investment (FDI). By reducing corporate income tax burdens, providing fiscal loss compensation, and accelerating asset depreciation, this incentive helps businesses maximize profits while supporting economic growth.
For investors looking at Indonesia’s priority sectors, tax allowance is a key advantage. Companies should consult Government Regulation No. 78 of 2019 and Minister of Finance Regulation No. 16/PMK.010/2020 to understand eligibility criteria and benefits.
For those who are interested in Indonesia’s tax policy and need further assistance, 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:
