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Permanent Establishments Clarified

On April 1, 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 (a “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 or an “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).

♦  VAT Registration

In addition to an NPWP, if a PE delivers goods or services that are taxable under the Value Added Tax (“VAT”) Law (Law No. 8 of 1983, 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 PEs

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.

♦  Forms of Business Place

Under the Regulation, the following list forms a place of business:

• 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 PEs

 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 (the “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 (a “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.

by Bonar

New Minister of Trade Regulation on Company Registration

With the launch of the new electronic licensing system, namely the Online Single Submission (the “OSS”) system, the Government is seeking to significantly improve the ease of doing business in Indonesia. As part of this initiative, the Minister of Trade (“MOT”) issued MOT Regulation No. 76 of 2018 dated July 20, 2018 on the Organization of Company Registrations (“MOT Reg. 76/2018”).

Company registration is regulated under Law No. 3 of 1982 on Mandatory Registration of Companies (“Law 3/1982”).  Law 3/1982 defines company registry as an official registry containing matters which must be registered by each company, and ratified by an authorized official of the company registry office.

The implementing regulation on the obligation to hold company registry was MOT Regulation No. 37/M-DAG/PER/9/2007 dated September 4, 2007 on the Organization of Company Registration, as amended several times and lastly by MOT Regulation No. 08/M-DAG/PER/2/2017 on the Second Amendment to MOT Regulation No. 37/M-DAG/PER/9/2007 on the Organization of Company Registration (collectively, “MOT Reg. 37/2007”).

Company registration under MOT Reg. 37/2007 was proven by the issuance of a Company Registration Certificate (Tanda Daftar Perusahaan – “TDP”) by the MOT.

MOT Reg. 76/2018 now provides that company registration shall now be undertaken through the OSS by way of securing a Business Identification Number (Nomor Induk Berusaha – “NIB”) issued by the OSS Agency. The NIB serves as TDP, Importer Identification Number (Angka Pengenal Importir – “API”) and customs access right (hak akses kepabeanan).

MOT Reg. 76/2018 revokes the following regulations:

• MOT Reg. 37/2007;
• MOT Regulation 77/M-DAG/PER/12/2013 on the Simultaneous Issuance of Business Trade Licenses and Company Registration Certificates for Trade Companies as lastly amended by MOT Regulation No. 14/M-DAG/PER/3/2016 on the Amendment to MOT Regulation No. 77/M-DAG/PER/12/2013 on the Simultaneous Issuance of Business Trade Licenses and Company Registration Certificates for Trade Companies;
• MOT Regulation 48/M-DAG/PER/6/2016 on the Delegation of Authority to Issue Company Registration Certificates to the Batam Free-Trade and Free Port Area Management Agency, the Bintan Free-Trade and Free Port Area Management Agency, the Karimun Free-Trade and Free Port Area Management Agency and the Sabang Free-Trade and Free Port Area Management Agency as amended by MOT Regulation No. 49/M-DAG/PER/7/2016 on the Amendment to MOT Regulation No. 48/M-DAG/PER/6/2016 on the Delegation of Authority to Issue Company Registration Certificates to the Batam Free-Trade and Free Port Area Management Agency, the Bintan Free-Trade and Free Port Area Management Agency, the Karimun Free-Trade and Free Port Area Management Agency and the Sabang Free-Trade and Free Port Area Management Agency.

♦  Types of business entities

The obligation to obtain an NIB as TDP under MOT Reg. 76/2018 applies to limited liability companies (PT), cooperatives, limited partnerships (CV), firms (firma), sole proprietorships (perusahaan perseorangan), and other forms of businesses, including branch offices of foreign companies that perform business operations in Indonesia.

♦  Obligations

In order to obtain an NIB, a company must complete the following information:

1. name and citizenship identification number (NIK);
2. address;
3. business sector;
4. investment location;
5. amount of investment plan;
6. worker recruitment plan;
7. contact number of the business and/or activity; and
8. plan for requesting fiscal, and customs facilities and/or other facilities.

Any changes to company data of the registered company must be reported through the OSS system.

A company that has obtained its NIB as TDP is required to (i) display the NIB at a location that is easily accessible and readable by the public; and (ii) incorporate the NIB on company name plates and company documents utilized during its business activities.

The process of obtaining an NIB as TDP is free of charge.

♦  Transitional Provision

Business entities that have company registrations based on MOT Reg. 37/2007 must obtain NIBs based on MOT Reg. 76/2018 at the latest 2 (two) years after the enactment of MOT Reg. 76/2018.

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by Bonar