Tax Incentives for Businesses in Indonesia

Indonesia has enhanced and improved the incentives offered to businesses in a bid to spur foreign and domestic investments into the country. These incentives include long-term tax reductions for major investments, no import/excise duties, and a simplified immigration process.

Contributing Advisor

Duha Ziaun

Senior Associate, Corporate Accounting Services

Tax incentives for investments in priority sectors

Companies that invest a certain amount in one of the 246 prioritized business categories will receive fiscal and non-financial benefits.

Fiscal incentives include a 50 percent corporate income tax reduction for investments between 100 billion rupiah (US$6.6 million) and 500 billion rupiah (US$33.3 million) for a period of five years and a 100 percent CIT reduction for investments over 500 billion rupiah (US$33.3 million) for a period between five and 20 years.

Tax benefits include a 30 percent reduction in the taxable income on the total investment for six years, a special withholding tax rate on dividends of 10 percent, and tax losses carried forward for up to 10 years.

To classify as a priority sector, business enterprises must meet the following criteria:

• Must be labor intensive;
• Must be capital intensive;
• Must be part of a national project/program;
• Must be export-oriented;
• Must involve a pioneer industry (renewables, oil refining, metals, etc.);
• Must utilize advanced technologies; and
• Must implement research and development activities.

Tax allowance for investments in specific sectors and regions in Indonesia

There’s a variety of income tax incentives available for businesses investing in specific provinces (such as Aceh, Greater Jakarta, and Riau) and industries, such as marine and fisheries, pharmaceuticals, IT, and energy, among others, in the country.

These incentives come in the form of tax deductions, the accelerated depreciation of fixed tangible assets, and the accelerated amortization of intangible assets. The regulation also increases the period for fiscal loss compensation, in addition to setting the income tax rate on dividends for foreign taxpayers at 10 percent.

Deduction in net income of the total investment

The government offers a deduction of the net income by 30 percent of the total investment value. This is charged at five percent per year for six years, in the form of intangible assets, including land.

Accelerated depreciation of tangible fixed assets

The government allows accelerated depreciation of tangible assets for incentivized regions, calculated as follows.

Accelerated amortization of intangible assets

The government allows the accelerated amortization of intangible assets for incentivized regions, as calculated below.

• This applies to intangible assets such as patents, copyrights, licenses, software, goodwill, and other similar non-monetary rights.
• If the asset has a useful life exceeding 20 years, businesses must use the actual useful life based on accounting treatment and notify the Directorate General of Taxes (DGT).
• The older option of 2-year or 10-year amortization no longer applies under the current regulation.
• The amortization must not exceed the asset’s accounting useful life, unless otherwise regulated.

Compensation for losses

Compensation is available for losses of more than five years but for no more than 10 years.

An additional one-year of compensation is granted if investors implement one of several options laid out in the regulation. These are:

• Invest in a sector and region as stated under GR 78/ 2019;
• Invest in industrial or bonded zones;
• Engage in activities related to renewable energy;
• Assign 10 billion Rupiah (US$650,745) on social infrastructure programs;
• Utilize at least 70 percent of domestic raw materials or components by the second year of operations; or
• Employ at least 300 local workers and maintain this number for four consecutive years.

To gain a further two-year extension, investors can:

• Employ 600 Indonesians and maintain this number for four consecutive years;
• Assign at least five percent of their total investment value to research and development aimed at improving their products or services; or
• Export at least 30 percent of their total sales in a fiscal year (applies to specific sectors and are not located in bonded zones).

Reduction in income tax on dividends

In Indonesia, income received by non-resident taxpayers—such as dividends, interest, royalties, and other income arising from Indonesian sources—is subject to withholding tax under Article 26 (PPh 26) of the Income Tax Law. The general withholding tax rate is 20 percent and is considered final, meaning the tax is not creditable or deductible against any other tax obligation in Indonesia.

However, this standard 20 percent rate may be reduced under the provisions of a Double Taxation Avoidance Agreement (DTA) between Indonesia and the taxpayer’s country of residence. To benefit from this reduced rate, the non-resident taxpayer must provide a valid Certificate of Domicile (SKD) using Form DGT-1, as regulated under PER-25/PJ/2018. The Indonesian withholding agent (payer) must ensure that the SKD is properly completed and submitted to the tax office to apply the treaty rate.

For example, dividend payments to residents of treaty-partner countries may be subject to reduced withholding tax rates ranging from 10 percent to 15 percent, depending on the treaty terms. Similarly, interest may be taxed at a reduced rate of 5 percent to 15 percent, and royalties as low as 0 percent to 10 percent. If the recipient fails to provide the required documentation, the default rate of 20 percent will apply.

Indonesia also applies a special 10 percent rate on bond interest paid to non-residents who are not classified as permanent establishments (PEs), subject to specific conditions. In addition, branch profits distributed by Indonesian branches of foreign entities may also be subject to the 20 percent rate or a treaty-reduced rate, depending on the circumstances.

It is essential for Indonesian payers to ensure proper withholding, reporting, and remittance of PPh 26. Taxes withheld must be paid by the 10th of the following month, and the return (e-Bupot) must be filed by the 20th. Failure to do so may result in administrative sanctions or penalties.

With the continued emphasis on international tax compliance, Indonesian authorities are becoming more stringent in enforcing proper documentation and accurate tax treatment for cross-border payments. Therefore, companies making payments to foreign entities must be diligent in checking the recipient’s tax residency status and ensure timely submission of all relevant treaty documents to avoid unnecessary exposure to the full 20 percent tax.

Tax incentives for investments in labor-intensive industries, training programs, and R&D

The Indonesian government continues to expand its incentive framework to promote investments that drive innovation, boost employment, and improve workforce quality. Through a series of super deduction schemes, the government provides significant tax relief for companies investing in labor-intensive sectors, vocational training, and research and development (R&D) initiatives.

Labor intensive industries

To support economic growth, job creation, and industrial expansion, the Indonesian government provides significant tax incentives for businesses investing in labor-intensive and pioneer industries.

Under Government Regulation No. 45 of 2019 and Minister of Finance Regulation No. 16/PMK.010/2020, eligible taxpayers can benefit from a net income reduction of up to 60 percent of the total investment value in tangible fixed assets, including land used for the main business activities. This incentive is applied over a period of six years, with a deduction of 10 percent of the investment each year, starting from the year in which the company begins commercial production.

A labor-intensive industry is generally defined by the Ministry of Industry as a business employing at least 200 workers, with labor costs constituting no more than 15 percent of total production costs. Meanwhile, under the tax incentive framework, labor-intensive classification typically refers to companies that employ 300 or more local workers in accordance with relevant KBLI classifications.

On the other hand, pioneer industries are industries deemed vital for the national economy. These industries are expected to generate substantial value-added, introduce advanced technologies, and serve strategic functions in Indonesia’s long-term industrial roadmap. Examples include oil refining, upstream metals processing, telecommunications infrastructure, and pharmaceuticals.

These incentives reflect Indonesia’s policy to attract targeted investment that contributes not only to fiscal growth but also to inclusive development, particularly in regions outside of Java. Businesses seeking to utilize these facilities must apply through the Online Single Submission (OSS) system and submit required documentation to the Ministry of Investment (BKPM) and the Directorate General of Taxes.

R&D activities

Indonesia is increasingly recognizing the critical role of innovation and technology in driving economic transformation. To encourage businesses to invest in Research and Development (R&D) activities, the government offers generous tax incentives through Government Regulation No. 45 of 2019, further regulated under Minister of Finance Regulation No. 153/PMK.010/2020.

Taxpayers conducting qualified R&D activities within Indonesia can benefit from a super deduction of up to 300 percent of the total R&D expenses. This means that companies may deduct three times the value of their eligible R&D costs from their taxable income, significantly reducing their overall corporate income tax liability.

To qualify for this incentive, the R&D must:

• Be conducted in Indonesia and not outsourced abroad;
• Be aimed at producing new products, processes, or materials that have clear commercial applications;
• Be supported by proper documentation, including detailed records of expenses, project scope, timelines, and expected outcomes;
• Be approved by the Ministry of Research and Technology (now part of the Ministry of Education, Culture, Research, and Technology) and the Directorate General of Taxes.

Eligible R&D expenditures include costs related to:

• Salaries of R&D personnel;
• Procurement of tools, materials, or equipment used for research;
• Costs associated with laboratory testing, prototypes, and product trials;
• Licensing and patent registration expenses.

This incentive not only reduces tax burdens but also encourages companies to invest in long-term innovation, increase competitiveness, and contribute to the development of local talent and technologies. Through this regulation, Indonesia aims to establish itself as a regional hub for innovation and smart industry, aligning with global trends toward knowledge-based economic growth

Training programs

Investors can receive a gross income reduction of up to 200 percent of the total costs incurred, who are looking to start apprenticeship programs or training activities to develop workers based on ‘certain competencies.’ The regulation defines certain competencies as developing human resources that can meet the labor requirements needed by national industries and businesses.

Incentives in Indonesia’s special economic zones

After the tax holiday ends, taxpayers receive a 50 percent CIT reduction for the next 2 years. Further, during the concession period, no withholding tax (WHT) is applied to eligible income, such as income from land and building rental.

Corporate income tax allowance

To attract major investments into strategic sectors, the Indonesian government offers corporate income tax exemptions, commonly referred to as tax holidays, under the framework of Government Regulation No. 78 of 2019 and its implementing regulation of the Minister of Finance Regulation No. 130/PMK.010/2020.

These exemptions are granted to eligible companies making new investments in pioneer industries—sectors that are capital-intensive, high-tech, support national competitiveness, or have a broad economic impact.

Under this scheme, qualifying companies can enjoy 0 percent corporate income tax for a period ranging from 5 to 20 years, depending on the amount of investment

Import and excise duties

Import duties, tax on the importation, and excise duties are all exempted on the following dutiable/taxable goods:

• Capital goods used for the construction or development of SEZs for five years;
• For the entry of consumable raw materials for service industries (for tourism SEZs); and
• Entry of goods to be sold in shops and shopping centers (for tourism SEZs).

VAT and sales tax on luxury goods

VAT will not be collected in relation to the following activities:

• The import of taxable tangible goods into an SEZ by a business entity;
• The delivery of taxable tangible goods from another Indonesian free trade zone, customs area, or bonded storage facilities to a business entity;
• The delivery of taxable services or goods, including land or buildings by a business entity in an SEZ to another business entity in the same or another SEZ; and
• The import of consumer goods into a tourism SEZ.

The non-collection of VAT also applies to raw materials needed to produce taxable services or goods related to ship and aircraft maintenance, repair, and overhaul (MRO) activities.

Right of foreigners to own apartments and landed houses in special economic zones

Indonesia has made it easier for foreigners to own real estate in special economic zones, free trade zones, industrial zones, or other economic zones (tourism zones, suburban zones, or urban zones).

The properties owned by foreigners are subject to certain restrictions such as:

• Minimum price;
• Land area and number of apartment units;
• Residential zoning; and
• Land space.

The minimum price for landed houses and apartment units varies between provinces.

Immigration

There is special treatment for foreign workers in special economic zones. Foreign workers can obtain temporary resident status for themselves and their families, and they could obtain permanent resident status if they hold property in the SEZ.

Business licenses

The Indonesian government has eased the issuance of business licenses through the Online Single Submission website for investors operating in SEZs.

Right to use, right to build, and right to cultivate for foreign investors

There are several land titles that foreign investors should be aware of. These are:

• Right to manage (Hak Pengelolaan, HPL);
• Right to cultivate (Hak Guna Usaha, HGU);
• Right to use (Hak Pakai, HP);
• Right to build (Hak Guna Bangunan, HGB)
• Right of ownership over stacked units (Hak Milik Atas Satuan Rumah Susun, HMSRS);
• Rights for underground and overground space; and
• Land registration

There are two types of right-to-use (HP) titles:

• Right to use within a certain period; and
• Right to use for land used for specific purposes.

This land title usually refers to the right to use/harvest land directly owned by the state or private land. This land could also be used for a building site in addition to agricultural purposes.

The right to use the title for a certain period can be granted to foreign legal entities that have a representative office, foreign citizens, as well as local entities and citizens. This encompasses state land, freehold title land, and the right to manage land.

If granted for state land and the right to manage land, the title is for a maximum term of 30 years and extendable for another 20. Once the period expires, the title can be extended for another 30 years (a total of 80 years).

HGU, HGB, and HP title holders must commence activities on the land, whether building construction, cultivation, or other use of land, within two years of the title being granted.

Incentives for Indonesia’s New Capital City Project

Indonesia’s government offers various fiscal and non-fiscal incentives to businesses seeking to invest in Indonesia’s new capital city, Nusantara.

Income tax reductions and holidays

The government will provide up to 100 percent corporate income tax exemption of between 10 and 30 years for domestic taxpayers investing at least 10 billion rupiah (US$650,745) in the new capital. The duration of the incentive depends on the sectors in which the investment is directed.

For instance, investing in public services will receive the longest tax holiday up until 2035. Banks and insurers that invest before 2035 can enjoy up to 25 years of income tax exemption whereas those that invest before 2045 can receive up to 20 years of income tax exemption.

Other sectors include:

Developers of other critical infrastructure, such as public works, airports, seaports, and housing, can also benefit from the incentives, as well as businesses that engage in economic development through the construction of hotels, malls, energy infrastructure, and software, among many others.

Corporate income tax reductions will be available for investors developing financial centers in the new capital, as well as for companies that relocate their head offices to the new capital. Moreover, investors implementing certain research and development activities will be afforded a reduction in their gross income.

Further, micro, small, and medium-sized enterprises in certain business activities will also pay a zero percent corporate income tax rate.

Utilization of foreign workers

Businesses operating in the new capital city will be allowed to employ foreign workers for 10 years; this can also be extended. The foreign worker can also secure residency permits for 10 years, which is also extendable depending on their employment contract.

The employer is also exempted from paying the Foreign Worker Compensation Fund, which is the amount of US$100 paid every month to the Ministry of Manpower.

The residency permits of foreign workers who hold management positions in companies operating in the new capital will remain valid as long as they retain that said position.

Land rights

The government offers investors 95-year land use permits, which can be extended for another 95 years and thus totaling 190 years for land use.

There will be two categories of land in Indonesia’s new capital:

• State-owned property that will be managed by the Nusantara Capital City Authority (a special agency tasked with governing and managing the new capital city) and
• Assets that have been granted to the capital city authority through the right-to-manage (Hak Pengelolaan – HPL) deed titles.

The capital city authority can allocate these HPL lands to businesses for the following land rights/titles:

• Right to cultivate (Hak Guna Usaha – HGU);
• Right to build (Hak Guna Bangunan – HGB); and
• Right to use (Hak Pakai – HP).

Customs

The government offers exemptions on import duties for the import of goods used for the construction and development of Indonesia’s new capital. There are import duty exemptions for the import of goods and materials used in the construction and development of industries within the new capital.