Indonesia permanent establishment risk begins before a foreign company has any office here. A company with no local entity, no registered address and no Indonesian bank account can still be taxed in Indonesia as a permanent establishment (in Indonesian, bentuk usaha tetap or BUT) if its people, agents or activities meet the tax test. This article sets out what creates a permanent establishment, what the new rule PMK 112/2025 changed, how the tax bill is built, and when establishing a PT PMA is the cleaner answer.
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What Permanent Establishment Means in Indonesia
A permanent establishment is a form of business through which a non-resident individual or company carries on business or activities in Indonesia. The profit attributed to it is taxed in Indonesia as if it were a local taxpayer. The company does not need to be incorporated here for this to happen. Finance Ministry Regulation 35/PMK.03/2019 sets out how the status is determined.
The Triggers in the Tax Rules
Article 4 of PMK 35/2019 gives two routes. The first is a place of business that meets three tests: it exists in Indonesia, it is permanent, and the foreign party uses it to carry on business. The second is a list of forms that count even without a fixed place.
| Trigger | What the rule says | Typical real-life example |
| Place of business | Any place, space, facility or installation, including machinery and equipment: a management office, branch, representative office, office building, factory, workshop, warehouse, sales or promotion space, and computers, electronic agents or automated equipment used to run business online. You do not need to own or rent it (Article 5) | A “sales office” used to manage Indonesian customers |
| Permanent | Used continuously and at a fixed geographic location (Article 5(3)) | A desk used every working day |
| Construction, installation or assembly project | A permanent establishment even without a fixed place. Consulting, supervision and survey work count, and so does work done abroad or passed to subcontractors. For treaty purposes the project must run longer than the treaty period (Article 7) | Machinery installed by the parent’s engineers |
| Services in any form | More than 60 days within any 12-month period, by employees or others hired by the foreign party or its subcontractor, performed in Indonesia for a party in Indonesia or abroad. Part of a day counts as a full day (Article 8) | A regional team seconded to a client in Jakarta |
| Dependent agent | An agent acting for and on behalf of the foreign party, meaning it takes instructions for the foreign party’s benefit or does not bear its own business risk (Article 9) | A local contact who negotiates and closes deals for you |
| Insurance agent or employee | Receives premiums or bears risk in Indonesia (Article 10) | A foreign insurer’s local agent |
Business or activity here includes anything done to obtain, collect or maintain income (Article 4(3)). An agent, broker or intermediary that is truly independent and acts only in its own business does not create a permanent establishment (Article 9(3)).
Where a Tax Treaty Changes the Answer
Indonesia has a network of tax treaties (P3B). Where a treaty applies, the project and service periods are those in the treaty, which can be longer than the domestic 60-day test. Treaty status is also where the “preparatory or auxiliary” exception lives: Article 6 of PMK 35/2019 applies it only for treaty purposes. It covers activities that prepare for, or support, the essential and significant activity, but not activities that are the core business, an integral part of it, directly generate income, or use significant assets or staff. It does not apply when the activity is carried out for other parties. Without a treaty, the exception does not protect you, and the company must be able to show that it qualifies for treaty benefits. Check the specific treaty for your country before relying on a threshold you read here.
PMK 112/2025: “Preparatory” Is No Longer a Safe Label
Many foreign companies assumed that “preparatory or auxiliary” activities, such as storage, display, delivery or gathering information, never create a permanent establishment. PMK 112/2025, signed on 30 December 2025, sets out how Indonesia applies its tax treaties and adds anti-abuse rules on permanent establishment status. Its key points:
- The exception is tested, not assumed. Article 22(1)(e) treats a foreign company as having a permanent establishment when it does more than preparatory or auxiliary work in Indonesia, as determined under PMK 35/2019. Article 25 then says the tax authority checks that the listed activities, or the whole combination of them, really are preparatory or auxiliary, including activities carried out by closely related persons.
- Related parties are counted together. A closely related person is one that controls, or is controlled by, the foreign company or shares common control with it, or one linked by more than 50% ownership (Article 25(5) to (8)). For construction, installation or assembly projects, the periods of closely related persons at the same site are added to your own (Article 23); the rule refers to projects running more than 30 days.
- Agents are read more widely. Beyond an agent who habitually concludes contracts, Article 22(1)(c) covers an agent who habitually delivers goods on your behalf, and Article 24 covers one who does not sign contracts but habitually plays the main role that leads to contracts being agreed without material change by you.
- DJP can act. Where treaty abuse in determining permanent establishment status is found, Article 26 allows the tax office to issue a taxpayer number to the permanent establishment ex officio.
The regulation applies where a tax treaty is in play, and the treaty text still sets the thresholds that apply to you. But DJP now has a clearer, written basis to test whether a “support” function is really the business.
What the Tax Exposure Looks Like
If a permanent establishment exists and was never registered, DJP can assess the tax that should have been paid. The main parts are:
| Item | Rate or rule | Source |
| Corporate income tax on attributed profit | 22% | Income Tax Law, Article 17 as amended by the Tax Harmonisation Law |
| Branch profit tax on after-tax profit | 20%, or a lower treaty rate | Income Tax Law, Article 26(4) |
| VAT | 12% rate, applied on 11/12 of the tax base for most goods and services, so the effective rate is 11%; luxury goods bear 12% in full | PMK 131/2024 |
| Withholding on payments | Applies to local staff, contractors and other payments | Income Tax Law |
| Assessment period | Generally five years back | General Provisions and Tax Procedures Law, Article 13 |
A permanent establishment must register for a taxpayer number (NPWP) within one month of starting business or activities through it (PMK 35/2019, Article 2(3)), and register for VAT if it makes taxable supplies above the small-business limit (Article 3). If it does not register, DJP can issue the NPWP ex officio (Article 2(4)). Interest and penalties are added to the tax assessed. The key point is that the bill covers the full period in which the permanent establishment existed, not only the period after DJP notices it. For a company that has been sending staff for two or three years, that is a large number.
A Representative Office Is Not a Safe Harbor
A foreign company that wants a “light” presence often opens a representative office. A representative office does not carry out revenue-generating activity or sign commercial contracts, and a “kantor perwakilan” is itself listed in Article 2(5). If staff there negotiate prices or conclude deals, or the office goes beyond liaison work, the activity can be treated as a permanent establishment even though the licence does not allow it. That is the worst combination: a tax exposure and a licensing breach. See our guide to a PT PMA versus a representative office, or our representative office service if a liaison role is all you need.
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Why Foreign Companies Underestimate This Risk
- The activity feels small. Sending one manager “to support customers” does not feel like operating a business.
- No licence is involved. Tax status follows what you do, not what you registered.
- The risk is retrospective. Nothing happens until DJP asks, and then the review covers past years.
- Outsourcing blurs the picture. Using local contractors or business process outsourcing in Indonesia can reduce the footprint, but a contractor who acts as a dependent agent can still create a permanent establishment.
CoreTax and Why DJP Can See More
DJP’s CoreTax system went live in January 2025 and brings returns, withholding data and identification into one platform. Payments to your Indonesian customers, withholding slips issued to your local contractors and import records can now be matched more easily. The practical effect is that the gap between “no entity” and “tax presence” is easier for DJP to spot than before.
What a PT PMA Fixes and What It Does Not
A PT PMA is a separate Indonesian taxpayer. Its profits are taxed in Indonesia, and dividends it pays out follow the rules in our guide to dividend withholding tax for foreign shareholders. That gives a clean structure for doing business here.
What a PT PMA does not do is erase past exposure. If the parent’s own staff already operated in Indonesia before the company existed, those earlier periods remain open. And if the parent keeps controlling local contracts through its own people, the parent can still be argued to have a permanent establishment in addition to the PT PMA. Set the roles up on paper and in practice. The company registration side is covered in our PT PMA minimum capital guide: the paid-up capital figure is IDR 2.5 billion per company under BKPM Regulation 5/2025, with a separate investment value test of more than IDR 10 billion per five-digit KBLI code per project location. If you are a US company weighing the options, read how a US company can expand into Indonesia through a PT PMA. Keep nominee structures out of the picture; they bring their own risks, covered in our guide to nominee shareholder risk.
Pillar Two for Larger Groups
Large groups face an additional layer. PMK 136/2024, issued 31 December 2024 and effective 1 January 2025, introduces the global minimum tax in Indonesia for multinational groups with annual gross revenue of at least EUR 750 million, using the income inclusion rule, the undertaxed profits rule and a domestic minimum top-up tax. A permanent establishment that is under-reported can feed into the group’s effective tax rate calculation. Smaller groups below the threshold are not in scope, but the same information flows into group reporting and can surface in due diligence.
How to Test Your Exposure Before DJP Does
Ask these questions about the last three to five years:
- Did any employee, secondee or contractor work in Indonesia for more than 60 days in total in any 12-month period?
- Does anyone in Indonesia negotiate, or play the main role in agreeing, contracts for you?
- Do you hold stock, equipment or space here, even through a third party?
- Do related companies perform parts of the same project at the same location?
- Does your representative office do more than liaison work?
- Does a tax treaty with your home country change the threshold for you?
If any answer is yes or unclear, get a structured review. Contact the XPND team for an assessment of your exposure, before an audit letter does the same job.
