Taxation of Dividends according to the Job Creation Law in Indonesia

The issuance of the Job Creation Law No. 11 of 2020 has changed several provisions in taxation, one of which is the taxation of dividends. Before going into the section on discussing the tax provisions on dividends before the Ciptaker Law was issued, we will discuss the previous tax provisions, namely according to the Income Tax Law Number 36 of 2008.

 

Tax on Dividend Before the Ciptaker Act

A. Tax on dividends received by the individual taxpayers

Dividends received by the individual taxpayer will be taxed by the dividend payer at 10% and the nature of the income tax is final tax. The income which imposed final tax will be not combined with other income to be calculated at the individual income tax rate, is already subject to a special tax rate of 10%.

 

B. Tax on dividends received by corporate taxpayers

1. Dividends from within the country

a. Tax treatment of share dividends owned by Corporate Taxpayers below 25%

For limited liability companies, state-owned enterprises and region-owned enterprises that receive dividends from domestic entities whose shares are below 25% are subject to withholding tax in accordance with Article 23 of the Income Tax Law, tax rate of 15%.

 

b. Tax treatment of share dividends owned by Corporate Taxpayers is at least 25%

For limited liability companies, state-owned enterprises and regional-owned enterprises that receive dividends from domestic entities whose shares are above 25% and the dividends are obtained from retained earnings reserves (retained earnings), dividend income is exempted as tax objects.

 

2. Dividends from abroad

For dividends obtained from abroad, apart from business entities that sell their shares on the stock exchange, according to Article 18 paragraph 2 of the Income Tax Law Number 36 of 2008, the Minister of Finance has the authority to determine when dividends are received and dividend calculation which is the basis for the imposition of income tax ("deemed dividend ") by domestic taxpayers who have shares in foreign business entities of at least 50% ownership or together with other domestic taxpayers own 50% of the shares of foreign taxpayers.

The provisions regarding the determination of the time of receipt of dividends and the basis for the calculation by domestic taxpayers for capital participation in foreign business entities other than business entities that sell their shares on the stock exchange have been regulated in Regulation of the Minister of Finance Number 107/PMK.03/2017 concerning Determination of Acquisition. Dividends and the basis for calculation by the Domestic Taxpayer for Equity Participation in Overseas Business Entities other than Business Entities that Sell their Shares on the Stock Exchange, and the amendments are the Minister of Finance Regulation 93/PMK.03/2019.

The article regarding the calculation of dividends from foreign business entities is discussed in our other article (click to read the article).

 

Tax on Dividend According to the Job Creation Act in Indonesia

With the Job Creation Law, taxation of dividend income originating from within the country and abroad is treated differently as follows.


1. Dividends originating from within the country

a. For domestic individual taxpayers as dividend recipients

As long as the dividend is invested in the territory of the Republic of Indonesia for a certain period of time;

b. For domestic corporate taxpayers as dividend recipients

Dividend income received is not subject to tax;

c. For foreign taxpayers as dividend recipients

Dividend income received is subject to withholding income tax at a rate of 20%, unless regulated by an International Agreement which means Double Taxation Avoidance Agreement or Tax Treaty (The provisions of the Government Regulation - 94 of 2010 article 26). The provisions for the implementation of the Government Regulation 94 is the Regulation of the Director-General of Tax PER-25/2018 regarding the procedure for implementing the double tax avoidance agreement.


 

2. Dividends originating from abroad

 

Dividends that are exempted as tax objects are:

Dividends originating from abroad and income after tax from a permanent establishment abroad received or obtained by domestic corporate taxpayers or domestic individual taxpayers, as long as they are invested or used to support other business activities in the territory of the Republic of Indonesia. within a certain period of time, and meets the following requirements:

  1. The invested dividends and income after tax shall be at least 30% (thirty percent) of the income after tax; or

  1. Dividends originating from business entities in foreign countries whose shares are not traded on a stock exchange are invested in Indonesia before the Director General of Tax issues a tax assessment on dividends in connection with the application of Article 18 paragraph (2) of the Ciptaker Law (The Authority of the Minister of Finance to determine the time of receiving dividends)


Dividends originating from abroad as referred to in this provision are:

a) dividends distributed come from business entities abroad whose shares are traded on a stock exchange; or

b) dividends distributed come from business entities abroad whose shares are not traded on the stock exchange in accordance with the proportion of share ownership;


Tax provisions on dividends from abroad for dividends invested in the territory of the Republic of Indonesia are less than 30% of the total income after tax

In the event that dividends distributed come from overseas business entities whose shares are not traded on the stock exchange in accordance with the proportion of share ownership invested in the territory of the Unitary State of the Republic of Indonesia less than 30% (thirty percent) of the total income after tax shall apply the following provisions:

  1. On dividends and after-tax income invested, are exempted from the imposition of Income Tax;

  1. The difference from 30% (thirty percent) of the income after tax is reduced by dividends and/or after-tax invested income as referred to in letter a) is subject to Income Tax; and

  1. The remaining income after tax is reduced by dividends and/or invested income after tax as referred to in letter a) and on the difference as referred to in letter b), is not subject to Income Tax;

 

Tax provisions on dividends from abroad for dividends invested in the territory of the Republic of Indonesia are more than 30% of the total income after tax

In the event that dividends distributed come from business entities abroad whose shares are not traded on the stock exchange in accordance with the proportion of share ownership invested in the territory of the Unitary State of the Republic of Indonesia in the amount of more than 30% (thirty percent) of the total income after tax, the following provisions shall apply:

a) the invested dividends and income after tax are exempted from the imposition of Income Tax; and

b) the remaining income after tax is reduced by dividends and/or invested income after tax as referred to in letter a), is not subject to Income Tax;

 

Taxes on income that have been paid or payable abroad on income shall apply the following provisions:

a) cannot be calculated with Income Tax payable;

b) cannot be charged as an expense or deduction from income; and/or

c) cannot be requested for a refund of the tax overpayment;

 

In the event that the Taxpayer does not invest income within a certain period, the following provisions shall apply:

a) The income from abroad is income in the tax year it is earned; and

b) Tax on income that has been paid or payable abroad on that income is a tax credit as referred to in Article 24 of this Law;

 

Further provisions regarding the criteria, procedures, and specific timeframes for investment, procedures for exemption from imposition of income tax, and changes to the limit on dividends invested are regulated by a Regulation of the Minister of Finance.

 

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