Permanent Establishment in Indonesia

On 1 April 2019, the Minister of Finance issued Regulation No. 35/PMK.03/2019 of 2019 on Determination of Permanent Establishments (the “Regulation”). Previously, permanent establishments were dealt with only in the Income Tax Law (Law No. 7 of 1983, as amended) and a Circular Letter issued of the Directorate General of Taxation. The Regulation was issued taking into account the significant growth of foreign tax subjects conducting businesses and activities in Indonesia through a permanent establishment (“PE”).

General Provisions: Under the Regulation, a PE is as follows:

  1. A foreign individual who does not reside in Indonesia or residing in Indonesia for less than 183 (one hundred eighty three) days within a period of 12 months; or
  2. A foreign entity established and domiciled outside of Indonesia.

A PE must obtain a Taxpayer Identification Number/ Nomor Pokok Wajib Pajak (“NPWP”) by no later than 1 (one) month after the commencement of a PE’s business or activity in Indonesia. If a PE does not do so, the relevant Tax Office has in its discretion the right to issue an NPWP to the PE.

Under applicable tax laws and regulations, once a PE has an NPWP, the PE is required to submit monthly and annual tax returns to the Indonesian tax authorities. Generally speaking, a holder of an NPWP must disclose all of its income (including income received outside Indonesia).

Value Added Tax ("VAT") Registration: In addition to an NPWP, if a PE delivers goods or services that are taxable under the Law No. 8 of 1983 on  VAT, (as amended) then the PE must register as a VAT entrepreneur and collect VAT and pay the collected VAT to the State Treasury.

Criteria of PE(s): The Regulation sets out the criteria for a foreign tax subject to become a PE as follows:

  1. Having a place of business in Indonesia;

  2. The place of business is permanent; and

  3. The place of business is used by a PE to conduct its businesses or activities.

In addition, the Regulation sets 4 (four) other types of activities that create a PE regardless if the place of business requirements above are not met:

  1. Construction, installation, or assembling projects;

  2. Provision of services in any form by an employee or any other person for more than 60 (sixty) days within a period of 12 (twelve) months;

  3. Any individual or entity acting as an exclusive agent; and

  4. Any agent or an employee of an insurance company, established and domiciled outside Indonesia, but generating insurance premium or covering risks in Indonesia.

Form of Business Place: The form business place are as follows:

  • A place of management;
  • A branch of a company;
  • A representative office;
  • An office building;
  • A factory;
  • A workshop;
  • A warehouse;
  • Space for promotion and sales;
  • Mining and excavation of natural resources;
  • A working area of oil and gas mining;
  • Fishery, farm, agriculture, plantation, or forestry; and
  • Any computer, electronic agent, or automatic equipment owned, leased, or used by a PE to conduct its business through the internet.

As seen above, the Regulation attempts to broaden the definition of a business place beyond physical space. In particular, point l above states that any use of computer, an electronic agent, or automatic equipment constitutes a PE.

For business places, the Regulation expressly provides that the determination of a business place does not regard whether a business place is owned or leased by a foreign tax subject.

Exemptions from PE(s): Activities of preparatory or auxiliary in nature are exempted from the definition of a PE.

What does this mean to a foreign tax subject?

Given the requirements to have an NPWP and a VAT collector number above and, more importantly the possible requirement to disclose income outside Indonesia, a foreign tax subject (“Foreign Subject”) should consider creating presence in Indonesia separate from the foreign legal entity. This may be achieved by establishing a limited liability company under Indonesian laws (“PMA Company”).  So then, the PMA Company (and not the Foreign Subject) will carry out business in Indonesia and be subject to Indonesian tax laws and regulations.  Obviously, this needs to be considered taking into account all factors for a Foreign Subject.

Equally important, foreign companies and individuals must not regard the Regulation as a license to do business in Indonesia. The Income Tax Law and the Regulation focus on the imposition of tax laws and regulations on foreign companies and individuals who do business in Indonesia.  There are specific laws and regulations regarding trading and doing businesses in Indonesia that foreign companies and individuals must comply with.


The article above was prepared by Marshall S. Situmorang (Partner).

Disclaimer: The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. Specific legal advice should be sought by interested parties to address their particular circumstances. For more information, please contact us at mail@nusantaralegal.com.