A Guide to Tax on Business Acquisitions and Closures in Indonesia

Navigating the landscape of business investment in Indonesia requires a solid understanding of the tax implications at every stage, from acquisition and restructuring to your eventual exit. For foreign companies, strategic planning is essential to ensure compliance and optimise financial outcomes. This guide breaks down the key tax considerations you need to know.

Key Takeaways

• Two Paths to Acquisition: Acquiring a business in Indonesia is done via a Share Deal (buying the company’s shares) or an Asset Deal (buying its assets), each with distinct tax obligations.
• Key Acquisition Taxes: A Share Deal may trigger a 5% withholding tax for foreign sellers, while an Asset Deal involving property incurs a 5% buyer’s tax (BPHTB) and a 2.5% seller’s tax (Final Income Tax).
• Tax-Neutral Option: Business acquisitions and reorganisations can be conducted without immediate tax consequences by using book value instead of market value, but this requires prior approval from the tax authority and meeting a “business purpose test.”
• Mandatory Exit Audit: Closing a business in Indonesia is not complete until the company undergoes a formal liquidation and passes a mandatory tax audit, after which a Tax Clearance Certificate is issued to allow for legal dissolution.

What are the main ways to acquire a business in Indonesia?

Foreign investors can acquire a business in Indonesia through two main methods: a share deal, which involves buying the company’s shares, or an asset deal, which involves purchasing the company’s assets. Each approach has distinct tax consequences that must be carefully considered.

1. What are the tax implications of a Share Deal?

A share deal, which involves buying an existing Indonesian company’s shares, primarily triggers a potential withholding tax for foreign sellers and has specific rules regarding Value Added Tax (VAT) and the use of asset valuation methods. This is only possible in business sectors open to foreign investment (PMA).

• Withholding Tax for Foreign Sellers
  When a foreign entity sells its shares in a private Indonesian company, the transaction is subject to a final withholding tax of 5% of the total share sale price. This is calculated from a 20% tax on a “deemed net income,” which is set at 25% of the sale price. This tax may be waived if a Double Taxation Avoidance Agreement (tax treaty) between Indonesia and the seller’s home country assigns taxing rights to the seller’s country.
• Share Premium and Discount
  If you acquire shares for more than their nominal value, the resulting share premium (agio saham) is not a taxable object. Conversely, if shares are acquired at a discount, the difference cannot be deducted from your gross income.
• Value Added Tax (VAT)
  Generally, a share transfer is not subject to VAT. In the broader context of an acquisition where business assets are transferred, the transaction is exempt from VAT, provided both the transferring and receiving companies are registered as Taxable Entrepreneurs (PKP). If either party is not a PKP, VAT will apply.
• Using Book Value vs. Market Value
  Asset transfers during an acquisition must typically use market value. However, you can apply to use the book value, making the transaction tax-neutral. To do this, you must get approval from the Directorate General of Taxes by proving the acquisition meets a “business purpose test,” confirming the goal is genuine business synergy, not tax avoidance.

2. What are the tax implications of an Asset Deal?

An asset deal, which requires a foreign investor to use a local PT PMA company, is subject to taxes such as Land and Building Rights Acquisition Duty (BPHTB), Final Income Tax for the seller, and withholding tax on related service fees. Foreign entities cannot directly own and operate assets, making the establishment of a PT PMA a necessary first step.

• Tax on Land and Buildings
  The acquisition of land and buildings is a significant taxable event. The buyer is responsible for paying the Land and Building Rights Acquisition Duty (BPHTB) at a rate of 5% of the transaction value. The seller must also pay Final Income Tax at a rate of 2.5% of the transaction value.
• Tax on Other Assets
  The purchase of other assets like machinery or inventory, generally does not trigger a withholding tax obligation for the buyer. However, any fees paid for related professional services (e.g., notary, valuation, legal) are subject to withholding tax under Article 23 (for corporate service providers) or Article 21 (for individual service providers).
• Asset Revaluation
  If your company chooses to revalue the newly acquired assets, any gain from this revaluation is subject to a 10% Final Income Tax. Note that a company can only perform an asset revaluation once every five years.

How is corporate restructuring taxed in Indonesia?

Corporate restructuring activities, such as mergers, consolidations, or spin-offs, are generally taxed based on gains calculated at fair market value. However, similar to an acquisition, these reorganisations can be conducted on a tax-neutral basis by using book value if the company meets the business purpose test and receives prior approval from the tax authorities.

It is important to note that Indonesian law does not currently accommodate direct cross-border mergers, which require more complex planning.

What is the tax process for closing a business in Indonesia?

The tax process for closing a business in Indonesia involves a formal dissolution and liquidation, which includes a mandatory final tax audit to settle all outstanding liabilities. When a foreign investor decides to close its Indonesian operations, the company will be audited by the Indonesian tax authority.

Only after all obligations are fulfilled will the Directorate General of Taxes issue a Tax Clearance Certificate, which is required before the company can be legally dissolved. As long as all taxes are paid correctly, there are no specific tax penalties for exiting the market.

How Permitindo Can Help

The tax and legal regulations for business acquisitions, restructuring, and exits in Indonesia are complex. Making the right strategic decisions from the outset is crucial to mitigate risk, ensure full compliance, and achieve your business objectives. With careful planning and expert guidance, these challenges can be navigated smoothly.

To discuss your specific situation and ensure your investment is structured for success, we invite you to fill in the form below or reach out to us at contact@permitindo.com.