Other BriefingsCan Foreign Investors Reduce Capital Gains Tax on Share Transfers in Indonesia?
Foreign investors can reduce Indonesian tax on the sale of shares in an Indonesian company through certain transaction structures or applicable tax treaty provisions. The outcome depends on how the investment is held and sold, and whether Indonesia retains the right to tax the sale.
How are share transfers taxed in Indonesia?
Under Indonesia’s domestic rules, a foreign investor selling shares in an unlisted Indonesian company is generally taxed at 5 percent of the gross selling price, rather than on the actual profit from the sale. A tax treaty can limit Indonesia’s right to impose this tax.
Consider a foreign investor that bought shares in an Indonesian company for IDR 80 billion (US$4.9 million) and later sells them for IDR 100 billion (US$6.1 million). The actual gain is IDR 20 billion (US$1.2 million), while the 5 percent tax on the selling price is IDR 5 billion (US$305,000). The Indonesian tax would equal 25 percent of the investor’s actual gain.
For an Indonesian company selling unlisted shares outside the stock exchange, the gain generally forms part of its taxable income. The standard corporate income tax rate is 22 percent. A taxable gain of IDR 20 billion (US$1.2 million) would result in IDR 4.4 billion (US$268,000) of corporate income tax before deductions, available tax losses, or other adjustments.
Shares sold through the Indonesian stock exchange are subject to final income tax of 0.1 percent of the gross transaction value. An IDR 100 billion (US$6.1 million) sale would result in IDR 100 million (US$6,100) of final income tax. Founder shareholders are also subject to an additional final tax of 0.5 percent based on the prescribed value of the founder shares.
Can investors reduce tax through the share sale terms?
An IDR 80 billion (US$4.9 million) sale produces IDR 4 billion (US$244,000) of tax at 5 percent, compared with IDR 5 billion (US$305,000) on an IDR 100 billion (US$6.1 million) sale.
This does not mean the buyer and seller can simply agree to a lower share price to reduce the tax. Related-party transfers must follow Indonesia’s arm’s-length rules, and a price below the economic value of the shares must have a commercial basis.
Where the deal includes other items, such as shareholder loans, the purchase price may need to be divided between the shares and the debt. That division should reflect the actual value of each item being transferred.
The share purchase agreement can also determine who bears the cost of the Indonesian tax. For example, a gross-up clause can shift the tax cost between the buyer and seller. The agreement can also set out who is responsible for withholding the tax, paying it, and providing documents needed to claim treaty benefits. These provisions do not reduce the tax itself, but they can change how much of the sale price the seller ultimately receives.
Would an asset sale produce a lower overall tax cost?
An asset sale moves the immediate taxable gain from the foreign shareholder to the Indonesian company.
Assume assets with a tax basis of IDR 80 billion (US$4.9 million) are sold for IDR 100 billion (US$6.1 million). The Indonesian company realizes a taxable gain of IDR 20 billion (US$1.2 million). At the standard 22 percent corporate income tax rate, the gain results in IDR 4.4 billion (US$268,000) of corporate income tax.
A foreign shareholder subject to the domestic share-transfer rules would instead face IDR 5 billion (US$305,000) of Indonesian tax on an IDR 100 billion (US$6.1 million) direct share sale.
The IDR 600 million (US$37,000) difference does not mean the asset sale is cheaper. Depending on the assets transferred, VAT and other taxes may arise. Distributing the sale proceeds from the Indonesian company to its foreign shareholder can also create another tax cost. The relevant comparison is how much the foreign investor ultimately receives after transaction and repatriation taxes.
A share purchaser acquires the company with its existing assets and liabilities, whereas an asset purchaser can acquire selected parts of the business.
Can a pre-sale restructuring reduce the tax cost?
Transferring an Indonesian investment between companies within the same group before an external sale can itself trigger Indonesian tax, even where the ultimate ownership of the business does not change. Certain qualifying corporate reorganizations may be eligible for book-value treatment, subject to the applicable conditions and approval requirements.
Suppose Indonesian shares worth IDR 100 billion (US$6.1 million) are transferred within the group before an eventual sale to a third party. The group must determine the Indonesian tax treatment and arm’s-length value of that internal transfer.
If the restructuring creates IDR 3 billion (US$183,000) of immediate tax and transaction costs but reduces tax on the later sale by only IDR 2 billion (US$122,000), the group is IDR 1 billion (US$61,000) worse off.
A restructuring connected to an already planned sale can also face anti-abuse scrutiny, particularly where its main effect is to obtain tax treatment that was unavailable under the previous ownership structure.
Can a tax treaty reduce tax on the final share sale?
A tax treaty can restrict Indonesia’s right to tax a foreign shareholder’s capital gain, depending on the provisions of the treaty.
Under the Indonesia-Singapore tax treaty, for example, Indonesia may tax gains from unlisted shares deriving more than 50 percent of their value directly or indirectly from Indonesian immovable property where the seller owns at least 50 percent of the company’s total issued shares. The treaty provides exceptions, including immovable property in which the company carries on its business and qualifying reorganizations. Gains from property not covered by the specified categories are taxable only in the seller’s country of residence.
This can materially change an IDR 100 billion (US$6.1 million) sale. Under Indonesia’s domestic rules, the foreign seller could face IDR 5 billion (US$305,000) of tax. Where a tax treaty gives the taxing right exclusively to the seller’s country of residence, Indonesia may not be entitled to impose the domestic tax. Tax may instead arise in the seller’s jurisdiction.
Treaty treatment depends on the entity making the sale. A Singapore holding company selling an Indonesian subsidiary, for example, must qualify for the relevant Indonesia-Singapore treaty benefits. The seller must also meet the applicable documentation and anti-abuse requirements.
Under the treaty’s principal purpose test, a treaty benefit can be denied where obtaining that benefit was one of the main purposes of the arrangement or transaction, unless granting the benefit would be consistent with the relevant treaty provisions.
Structuring an Indonesian share exit with Dezan Shira & Associates
Dezan Shira & Associates advises foreign investors on structuring share transfers and exits in Indonesia. Investors preparing a transaction can contact Dezan Shira & Associates to assess the applicable tax treatment, treaty position, and available structuring options before execution.
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