When Does a Foreign Company Create a Permanent Establishment in Indonesia?

A foreign company can create a permanent establishment in Indonesia through a project, local personnel, an office, or an agent. Find out which tests apply, how tax treaties can change the result, and what taxes follow.

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Review your Indonesian projects, personnel, and agents against domestic rules and the applicable tax treaty.

A foreign company can create a permanent establishment (PE), known locally as a Bentuk Usaha Tetap (BUT), in Indonesia through a fixed place of business, a construction or installation project, services performed by personnel, a dependent agent, or certain insurance activities. A PE gives Indonesia a basis to tax business income even if the foreign company has no Indonesian subsidiary. An applicable tax treaty can limit that taxing right.

What triggers a permanent establishment in Indonesia?

Indonesia’s Ministry of Finance Regulation No. 35/PMK.03/2019 (PMK 35/2019) sets out the domestic tests for a permanent establishment. If a tax treaty applies, its provisions may limit when Indonesia can treat a foreign company as having a permanent establishment.

Computers and other automated equipment used to conduct business online can qualify as a place of business in Indonesia. If a foreign company uses an Indonesian facility solely to store or manage data electronically and has limited access to operate it, the facility fails the access requirement under Indonesia’s fixed-place test for a permanent establishment.

How can a tax treaty change the permanent establishment test in Indonesia?

Indonesia’s domestic rules are the starting point. If a foreign company qualifies for benefits under an applicable tax treaty (Persetujuan Penghindaran Pajak Berganda, or P3B), the treaty may change the thresholds for a PE, set different rules for agents, or exclude certain activities. It may also cap the branch profits tax Indonesia can charge.

For example, the Indonesia–Singapore treaty sets a threshold of more than 90 days in a 12-month period for services, including consultancy. A Singapore tax resident that provides 75 days of qualifying services in Indonesia would exceed the domestic services threshold and remain below the treaty threshold. A fixed place of business or a dependent agent could still create a PE.

Check the treaty for the company’s jurisdiction of tax residence, along with any protocols and effective changes under the Multilateral Instrument (MLI). Treaty relief depends on meeting the applicable residence, documentation, and anti-abuse requirements. To claim treaty relief from Indonesian withholding tax, the foreign company generally gives Form DGT to the Indonesian withholding agent, which submits the required information through Coretax. Qualifying forms issued under the previous rules remain valid for the period stated on the form.

How does PMK 112/2025 affect permanent establishment risk in Indonesia?

Indonesia’s Ministry of Finance Regulation No. 112 of 2025 (PMK 112/2025), effective 31 December 2025, brings OECD-aligned anti-avoidance rules into the treaty permanent establishment tests. The outcome depends on the applicable treaty and any changes in force under the MLI.

• Splitting a project between related parties: Where the applicable treaty rule allows project periods to be combined, the foreign company’s own qualifying periods must total more than 30 calendar days, and each qualifying period of a closely related party at the same site must separately exceed 30 calendar days. Compare the combined period with the treaty’s project threshold. Closely related parties can include entities linked through control or qualifying ownership interests.
• Negotiating contracts in Indonesia and signing them overseas: Where the applicable treaty rule covers this arrangement, a dependent agent in Indonesia can create a PE by habitually playing the principal role in securing contracts that the foreign company routinely concludes without material changes. Check who settles prices and other key terms.
• Dividing business activities between related parties: Where the treaty’s anti-fragmentation rule applies, assess what the foreign company and its closely related parties do in Indonesia together before claiming a preparatory or auxiliary exemption. For example, storage may form part of a wider sales and distribution operation when considered alongside a related company’s activities.

If Indonesia’s Directorate General of Taxes finds that a foreign company misused a treaty to avoid PE status, it may issue an Indonesian taxpayer identification number (NPWP) for the PE on its own initiative.

What taxes apply to a permanent establishment in Indonesia?

• Tax registration: The foreign company generally has one month from the start of business or activities through the PE to seek an Indonesian taxpayer identification number (Nomor Pokok Wajib Pajak, or NPWP).
• Corporate income tax: Indonesia generally taxes a permanent establishment at 22 percent of its taxable income. Subject to any applicable tax treaty, the tax base can also include income the foreign head office earns directly from sales or activities in Indonesia of the same kind as those of the permanent establishment, as well as certain income effectively connected to it. Indonesia applies a separate final income tax to gross revenue from construction consultancy, construction work, and integrated construction services covered by Government Regulation No. 9 of 2022.
• Branch profits tax: The domestic rate is generally 20 percent of after-tax taxable income, even if the company retains the profits in Indonesia. A treaty can reduce the rate, and an exemption may apply where the company reinvests all after-tax profits in Indonesia and meets the relevant conditions.
• Other obligations: Review withholding, payment, and filing requirements, as well as value-added tax (VAT) registration and collection where applicable. Indonesia’s statutory VAT rate is 12 percent. For most taxable goods and services, the rate applies to 11/12 of the transaction value, resulting in an effective VAT charge of 11 percent. Certain luxury goods are subject to VAT at the full 12 percent.

Can Indonesia assess tax on an unregistered permanent establishment?

Yes. If Indonesia’s tax authority registers a foreign company on its own initiative, the company’s tax obligations may date back to when it first met the legal requirements, up to five years before registration. The start date depends on the company’s activities and any applicable tax treaty. Penalties may also apply.

The foreign company remains liable for any tax it owed before it set up an Indonesian subsidiary.

What can trigger an unexpected permanent establishment in Indonesia?

Foreign companies can overlook PE risk when local activities expand, assignments overlap, or staff take on more responsibility for contracts. Four situations warrant closer review:

• A representative office takes on commercial functions: If local staff begin negotiating prices or other key contract terms, reassess both the office’s permitted activities and the foreign company’s PE exposure.
• Teams count each assignment separately: Track service days across the applicable 12-month period. For construction, installation, or assembly projects, check separately whether the treaty requires qualifying periods worked by closely related parties at the same site to be combined.
• A distributor starts acting on the foreign company’s behalf: Review what the distributor does in practice. Habitually concluding contracts for the foreign company or playing the principal role in securing them where the applicable treaty covers that conduct, can trigger a dependent-agent PE.
• The foreign parent continues operating after local incorporation: If parent-company staff continue to negotiate or control Indonesian contracts after a subsidiary is established, assess those activities separately. The foreign parent remains responsible for any earlier tax liabilities.

How can foreign companies assess permanent establishment risk in Indonesia?

Before starting operations in Indonesia, assess whether your planned activities could create a permanent establishment under Indonesian law and any applicable tax treaty. Check four areas:

• People and timing: Identify who will perform the work and how long staff and subcontractors will work in Indonesia. For secondments, establish which company actually provides the services.
• Premises: Identify which offices, warehouses, or other facilities the foreign company can access and how it will use them.
• Contracts: Confirm who negotiates and approves key commercial terms and who signs the contracts.
• Operating structure: Check whether a representative office’s planned activities fall within its permitted scope and assess those activities separately for PE risk. If you operate through an Indonesian foreign-invested limited liability company (Perseroan Terbatas Penanaman Modal Asing, or PT PMA), assess the foreign parent’s own activities in Indonesia separately.

Keep project schedules, travel records, contracts, and records of who approved key commercial terms to support your assessment. Check business and sector licensing requirements separately from any tax registration obligations.

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