Foreign companies conducting business activities in Indonesia should consider whether their activities create a Permanent Establishment (“PE”), known in Indonesia as a Bentuk Usaha Tetap (“BUT”). A BUT is not an Indonesian legal entity such as a limited liability company (Perseroan Terbatas or “PT”), but rather a form of business presence of a foreign tax subject that may give rise to tax obligations in Indonesia.
Determining whether a BUT exists is important because a foreign company may have tax obligations in Indonesia even if it does not establish an Indonesian PT or subsidiary.
Legal Basis and Status of a BUT
The legal framework governing BUTs is primarily set out in the Income Tax Law and Minister of Finance Regulation No. 35/PMK.03/2019 on the Determination of Permanent Establishment.
A BUT may arise when a foreign individual or entity conducts business or activities in Indonesia through certain forms of business presence.
A BUT differs from a PMA company. A PMA company is an Indonesian legal entity established under Indonesian law, whereas a BUT is not a separate legal entity from the foreign company. The foreign company remains the entity conducting the business, while its presence in Indonesia may give rise to tax obligations as a BUT.
Accordingly, foreign companies should distinguish between the requirement to establish a business entity in Indonesia under investment and licensing regulations and the creation of a BUT under Indonesian tax regulations.
When Can a Foreign Company Become a BUT?
Certain forms of business presence may give rise to a BUT, including:
1. Fixed Place of Business
A BUT may arise where a foreign company has a place of business in Indonesia that is used to conduct its business activities, such as an office, branch, factory, workshop, warehouse, or other premises.
The assessment is not based solely on the name or legal form of the premises, but also considers its location, continuity of use, and function in the company’s business activities.
2. Construction, Installation, or Assembly Projects
Construction, installation, or assembly activities in Indonesia may create a BUT if they satisfy the applicable duration requirements under Indonesian tax regulations.
Where the company is resident in a country that has a Tax Treaty or Agreement for the Avoidance of Double Taxation (“P3B”) with Indonesia, the relevant threshold under the applicable P3B should also be reviewed, as it may differ from the domestic rules.
3. Provision of Services
The provision of services in Indonesia by employees or other personnel working for a foreign company may also create a BUT.
Under the domestic rules, the provision of services in Indonesia for more than 60 days within a 12-month period may satisfy certain requirements for the creation of a BUT. However, the applicable P3B may provide for a different threshold.
This is particularly relevant for foreign companies providing consulting, engineering, technology, management, professional, or other services through personnel located in Indonesia.
4. Dependent Agent
A BUT may arise where a foreign company conducts business activities in Indonesia through a dependent agent.
An agent may be considered a dependent agent where the agent acts for the benefit of the foreign company under certain instructions and does not independently bear the risks of the business or activities.
Accordingly, the use of distributors, representatives, business development personnel, or other parties in Indonesia should be assessed based on their actual activities and not merely on the form of their contractual relationship.
5. Insurance Activities
In the insurance sector, an agent or employee of a foreign insurance company may create a BUT where the agent or employee receives insurance premiums in Indonesia or assumes risks for parties domiciled or located in Indonesia, subject to the applicable regulations.
BUT and Business Licensing
The existence of a BUT for tax purposes does not automatically grant a foreign company the right to conduct all types of business activities in Indonesia.
A foreign company must still assess whether its proposed activities require a PMA company, representative office, Business Identification Number (NIB), licensing through the Online Single Submission (OSS) system, or other sector-specific licenses.
This distinction is important because there is a difference between a tax presence and legal authorization to conduct business.
For example, a representative office of a foreign company may perform certain permitted functions but is generally restricted from conducting commercial activities directly. If its actual activities exceed the permitted scope, the company may face both licensing risks and tax consequences.
Tax Obligations of a BUT
Where a foreign company has a BUT in Indonesia, several tax obligations may apply, including:
Income Tax (PPh). The taxable income of a BUT is generally subject to the prevailing corporate income tax rate of 22%.
Branch Profit Tax. After-tax profits deemed earned by or remitted to the head office may be subject to Branch Profit Tax at the domestic rate of 20%, subject to the applicable P3B.
VAT. Where a BUT supplies Taxable Goods or Taxable Services and meets the requirements to be registered as a Taxable Entrepreneur (Pengusaha Kena Pajak or “PKP”), VAT obligations may also apply. The applicable VAT rate and mechanism should be determined based on the nature of the transaction and the regulations in force at the relevant time.
NPWP and PKP. A BUT must comply with tax registration requirements and, where the relevant requirements are satisfied, register as a Taxable Entrepreneur (PKP).
The Role of P3Bs in Determining a BUT
For companies resident in countries that have a P3B with Indonesia, the determination of a BUT should be made by considering both domestic Indonesian law and the applicable P3B.
A P3B may provide specific rules concerning a permanent establishment, including rules for construction projects, the provision of services, dependent agents, and the attribution of profits to a BUT.
Therefore, a foreign company should not only consider whether its activities satisfy the definition of a BUT under Indonesian domestic law, but also whether Indonesia has the taxing rights under the applicable P3B with the company’s country of residence.
BUT and Foreign Employees
Where a foreign company conducts activities through a BUT and places foreign employees in Indonesia, applicable immigration and employment requirements must still be complied with.
The existence of a BUT does not, by itself, authorize foreign employees to work in Indonesia.
The company should ensure compliance with requirements relating to the employment of foreign workers, RPTKA where required, applicable work authorization, visas and stay permits, and other employer obligations.
Steps for Foreign Companies
Before commencing activities in Indonesia, a foreign company should:
- map out its proposed business model and activities in Indonesia;
- assess whether those activities may create a BUT;
- review the P3B between Indonesia and the company’s country of residence;
- determine the appropriate business structure and licensing requirements through OSS or the relevant authorities;
- fulfill applicable tax registration and reporting obligations if a BUT arises; and
- ensure compliance with tax, employment, immigration, and sector-specific regulations.
Conclusion
A BUT is not an Indonesian legal entity and should not be treated as equivalent to a PMA company. Rather, a BUT is a tax concept that determines when the activities of a foreign company in Indonesia create a business presence that may be subject to Indonesian taxation.
Accordingly, a foreign company should not rely solely on the absence of an Indonesian PT to conclude that it has no tax obligations in Indonesia.
Before commencing business activities, foreign companies should conduct an integrated assessment of their business structure, BUT exposure, P3B, licensing, taxation, employment, and immigration requirements to ensure that their activities in Indonesia are properly structured and compliant with applicable regulations.
How TAMA Global Mobility Can Assist
TAMA Global Mobility assists foreign companies, foreign investors, and multinational enterprises with:
- assessing potential BUT exposure;
- determining an appropriate business presence structure;
- reviewing applicable P3B considerations;
- assessing licensing and OSS requirements;
- coordinating employment and foreign worker matters;
- providing immigration and global mobility advisory; and
- identifying compliance risks and regulatory requirements before business activities commence.
TAMA Global Mobility integrates immigration, global mobility, corporate licensing, and regulatory advisory to help foreign companies establish a structured business presence in Indonesia.
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TAMA Global Mobility
WhatsApp: +62 821-1015-402
Email: info@tamaglobalmobility.com
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When Immigration Conducts an Inspection: What Can Immigration Officers Ask in Indonesia?
Change of Address in Indonesia: Immigration Reporting Obligations for Foreign Workers (TKA)
