In order to broaden the scope of Permanent Establishment so that it encompasses the development of international business models such as Over-the-Top operators, Indonesian Government once again enforces to regulate the OTT business to be classified as Permanent Establishment.

The term Permanent Establishment or Bentuk Usaha Tetap (“BUT”) is first introduced in Indonesian taxation laws. The Income Tax Law basically defines BUT as an establishment used for the purpose of conducting business or carrying out activities in Indonesia whereas such activities generate income regardless whether or not the entity carrying out such activities is Indonesian tax resident.

The new Regulation Number 35/PMK.03/2019 on the Determination of Permanent Establishments (“Reg 35/2019”) by Ministry of Finance (“MoF”) which came into force on 1 April 2019 states that any income generated by a Permanent Establishment in Indonesia is taxable.

Some key elements provided in Reg 35/2019 are as follows:

1)      Tax Identification Number or Nomor Pokok Wajib Pajak (“NPWP”) is mandatory for any foreign individuals or entities which fall under Permanent Establishment classification;

2)      For Permanent Establishment carrying out activities in relation to taxable goods, a report of the sale is now mandatory and a status as a Taxable Business or Pengusaha Kena Pajak (“PKP”) will be imposed upon it.

In order to broaden the scope of Permanent Establishment so that it encompasses the development of international business models such as Over-the-Top operators, Indonesian Government once again enforces to regulate the OTT business to be classified as Permanent Establishment.

 

The term Permanent Establishment or Bentuk Usaha Tetap (“BUT”) is first introduced in Indonesian taxation laws. The Income Tax Law basically defines BUT as an establishment used for the purpose of conducting business or carrying out activities in Indonesia whereas such activities generate income regardless whether or not the entity carrying out such activities is Indonesian tax resident.

 

The new Regulation Number 35/PMK.03/2019 on the Determination of Permanent Establishments (“Reg 35/2019”) by Ministry of Finance (“MoF”) which came into force on 1 April 2019 states that any income generated by a Permanent Establishment in Indonesia is taxable.

 

Some key elements provided in Reg 35/2019 are as follows:

1)      Tax Identification Number or Nomor Pokok Wajib Pajak (“NPWP”) is mandatory for any foreign individuals or entities which fall under Permanent Establishment classification;

2)      For Permanent Establishment carrying out activities in relation to taxable goods, a report of the sale is now mandatory and a status as a Taxable Business or Pengusaha Kena Pajak (“PKP”) will be imposed upon it.

 

In more details, below is the Classification and Criteria of Permanent Establishment under Indonesian regulation, including the implementation of Avoidance of Double Taxation Agreements (“P3B”).

 

If the place of business only carries out preparatory or auxiliary activities, it shall not be classified as BUT, unless such activities are carried out on behalf of other parties.

 

 

Place of business refers to any and all place, space, facility, or installation, including machinery or equipment,  which may be in the following forms without regard to the legal ownership or use of such place:

  • management office, branch office, representative office, office building, factory, workshop, warehouse/storage facility, space for promotion or sales
  • working area for oil, gas, and mineral mining
  • fishery, farming, agriculture, plantation or forestry
  • computers, electronic agents or automatic equipment, owned, leased or used by foreign individuals or entities to conduct business through the internet

A place of business shall be considered as being used on a permanent basis if it is:

  • being used continuously; and
  • located in a specific geographical area

A place of business shall be considered as being utilized to conduct business operations or activities provided that:

    • it is available for use with unlimited access by the foreign individuals or entities;
    • the place of business is used to conduct business or carry out activities; and
    • the place of business is not used solely for data storage and/or electronic data processing.

If the place of business only carries out preparatory or auxiliary activities, it shall not be classified as BUT, unless such activities are carried out on behalf of other parties.

 
 Construction projects, installations, or assembly projects

 Construction projects refer to the following:

  • Construction consultation services, which include assessment, planning, design, supervision, construction management, survey, technical testing or analysis
  • Construction works, which include development, operation, maintenance, demolition or rebuilding
  • Integrated construction works, which include building design model or engineering model, procurement, and implementation
Installations or assembly projects refer to the installation and assembly of
  • Projects in relation to construction project implementation
  • Machinery or equipment

The abovementioned projects shall be considered as but even if:

  • The construction work is carried out overseas; and/or 
  • the work is subcontracted to domestic or foreign sub-contractors
  The projects shall be classified as but if the work, including the parts subcontracted, exceed the time period set out in the relevant treaty.
 Services provided by employees or other parties for more than 60 days during a period of 12 months  The criteria for this type of BUT are as follows:
  1. The employees or other parties are employed by the foreign individuals or entities or their subcontractors;
  2. services are provided in Indonesia;
  3. services are provided to parties located in Indonesia or abroad
  

The provision of the said services shall be classified as BUT if the activities exceed the time period set out in the relevant treaty.
 Dependent agents  Individuals or entities acting as dependent agents shall be considered as BUT if they satisfy the following conditions:
  1. act on behalf of foreign individuals or entities;
  2. receive instructions from foreign individuals or entities to conduct business or carry out activities;
  3. do not bear any business risks; and are not independent.
  

In the event the dependent agents only carry out preparatory or auxiliary activities, they shall not be classified as BUT.
 Agents or employees of foreign insurance company  

Insurance agents or employees of foreign insurance company not established or domiciled in Indonesia shall be considered as BUT if they:

  1. receive insurance premiums within Indonesia; or
  2. insure parties residing, domiciled or located in Indonesia.
  Reinsurance activities shall not be classified as BUT.