Indonesia has enhanced and improved the incentives offered to businesses in a bid to spur foreign and domestic investments into the country.
The government has reduced more than 70 labor, tax, and other key laws to reduce bureaucratic inefficiencies, simplify business licensing requirements, and liberalize more industries for foreign investors.
Tax incentives in priority sectors
Companies that invest a certain amount in one of the 246 priority business lines will receive fiscal and non-fiscal incentives.
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.
There are tax allowances available in the form of 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.
Tax allowance in specific sectors and regions
There are a variety of income tax incentives 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. There is also an increase in the period for fiscal loss compensation, in addition to setting the income tax rate on dividends for foreign taxpayers at 10 percent.
Tax incentives in labor-intensive industries, training, and R&D
Labor intensive industries
Taxpayers that invest or expand into labor-intensive or pioneer industries can enjoy a net income reduction of 60 percent of their total investment in the form of tangible fixed assets, which includes any land used for the main business activities over a certain period.
The Ministry of Industry defines a labor-intensive industry as one that employs a minimum of 200 workers with labor costs not exceeding 15 percent of production costs, while the Ministry of Finance defines a pioneer industry as one that provides value-added economic consequences to the surrounding areas, introduces new technologies, and provides strategic value for the national economy.
Taxpayers that engage in R&D initiatives can receive a tax benefit of 300 percent in gross income reduction of total costs incurred. To avail of this facility, the taxpayer must be conducting R&D that is assessed by the government to be advancing the national economy, new industries, and technologies, or transfer of foreign technology to local businesses.
Investors looking to start apprenticeship programs or training activities to develop workers based on ‘certain competencies’ can receive a gross income reduction of up to 200 percent of the total costs incurred. 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
Indonesia aims to make its special economic zones (SEZs) a policy priority to attract foreign investment, boost industrial activity, and promote job creation. This strategy has been further facilitated through various incentive programs available throughout the special economic zones in Indonesia.
Exemption on corporate income tax
Business stakeholders in an SEZ are differentiated into two types of taxpayers:
- Badan usaha (business entities) and
- Pelaku usaha (businesspersons).
Both business entities and business players are eligible for a 100 percent reduction in corporate income tax (CIT) provided that their investments are conducted in SEZs and with a minimum investment value of 100 billion rupiah (US$7 million), for 10 years.
Corporate Income Tax Holidays for Special Economic Zones in Indonesia
Concession period (years)
100 billion rupiah (US$7 million)
Between 100 billion rupiah (US$7 million)
to 500 billion rupiah (US$35 million)
Between 500 billion rupiah (US$35 million)
to 1 trillion rupiah (US$70 million)
More than 1 trillion rupiah (US$70 million)
After the CIT mentioned above incentives expire, taxpayers are eligible for a 50 percent CIT reduction payable for the subsequent two 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
Taxpayers that invest 100 billion rupiah (US$7 million) are also eligible to receive several Corporate Income Tax allowances. These are:
- A 30 percent reduction in net income on the total investment on fixed assets reduced over six years over six years, at five percent per year;
- Accelerated depreciation allowances of up to 100 percent of tangible and intangible assets;
- A WHT rate of 10 percent, or the treaty rate (whichever is lower) on dividend payments made to non-resident recipients; and
- Tax loss is carried forward for up to 10 years.
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 Value Added Tax 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).
Foreign workers in special economic zones can obtain temporary resident status for themselves and their families. They could obtain permanent resident status if they hold property in the SEZ.
The Indonesian government has eased the issuance of business licenses through the Online Single Submission website for investors operating in SEZs.
Right to use, build, and 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).
For more information on HGU and HGB title holders, click here.
Incentives for Indonesia’s New Capital City Project: Nusantara
Jakarta is planning to relocate its capital to its new capital city of Nusantara, which is now under construction, and is expected to support government operations in 2024. The Indonesian government is offering a range of incentives to businesses that are planning to establish and operate in its new capital city.
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 that invest 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;
- 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 that develop financial centers in the new capital, as well as for companies that relocate their head offices to the new capital;
- Investors that implement certain research and development activities will be afforded a reduction in their gross income; and
- 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.
The government is offering 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).
The government offers exemptions on import duties for the import of goods used for the construction and development of Indonesia’s new capital. Further, there are import duty exemptions for the import of goods and materials used in the construction and development of industries within the new capital.