How to pay 0% tax in Indonesia on offshore dividends
If Indonesia isn’t necessarily known to be a tax haven, several new fiscal incentives should be carefully considered for foreigners, especially the ones receiving offshore dividends.
In some cases, residents can even get a perfect 0% tax rate on their offshore dividends brought to Indonesia.
Here is what you need to know.
Offshore dividends brought in Indonesia: an event that usually triggers tax for residents
Like in most countries, receiving dividends in Indonesia, whether they are onshore or offshore usually means that you have to pay taxes.
In Indonesia, the amount is different whether you are a resident (KITAS holder) or not:
- Resident tax on dividends: 10%
- Non-resident tax on dividends: 20%
Of course, double taxation treaties apply to avoid paying twice.
For more details about visas, read this guide that summarises all visas options to live in Bali.
The Omnibus law: an interesting tax incentive for foreign investments in Indonesia
The Omnibus is a set of law launched by the (then) president Joko Widodo in 2020.
The objective of this law is to remove red tape, modernise the Indonesian economy and ease foreign investment.
It proved very advantageous for foreigners that receive dividends from other countries.
The Omnibus law allows foreign dividends to be repatriated in Indonesia tax free
Foreigners residing in Indonesia who receive dividends or other kind of financial revenue from countries outside of Indonesia can pay 0 taxes in Indonesia, if they agree to bring back these dividends or financial incomes and reinvest it in Indonesian assets for a specific period.
In other words, you can live in Indonesia on your passive income from abroad tax-free as long as you agree to finance the local economy.
Conditions to pay 0% on your foreign dividends
The main conditions to pay 0% tax on your foreign dividends are the following:
- You are an Indonesian resident (you have a KITAS / KITAP)
- You have “capital gains” coming from outside of Indonesia
- You bring this capital to Indonesia
- You invest in Indonesian assets (more on this below)
- You keep your investment in these Indonesian assets for at least 3 years
Once this is done, you are free to do whatever you want with your repatriated income, with a great tax rate of 0%.
Indonesian assets types eligible for reinvestment to get tax exemption
Many types of Indonesian assets are eligible to invest your dividends and other financial income in order to benefit from the 0% tax rate.
Here are the main ones:
- Indonesian government treasury bonds
- Indonesian shares (stock exchange)
- Fixed term deposits
- Investment funds
- Paid-up capital for your own company
- Purchase of gold
- Real estate investment
As you can see, the asset classes open for the exemption are quite large, and can even include companies and investments that you manage yourself.
On the matter: read the article of the most profitable businesses in Bali.
The pros and cons of using the tax exemption of offshore dividends
Like any investment, investing your offshore dividends in Indonesia for a tax-exemption does come with its pros and cons you should seriously consider before jumping in. Here are the main ones.
Pros of using the tax exemption for your foreign dividends
The main advantages of the tax scheme are quite obvious and can be summarised as follows.
You pay 0% tax-free on your foreign dividends
Of course, not paying any taxes on your dividends is the main and most important perk.
0% tax is a hard to beat number. It can compete with pure tax haven, minus the downsides and the scrutiny that usually come with them.
Once eligible, all the money you receive is yours, and yours only.
You help finance the Indonesian economy
The Indonesian economy is booming. The archipelago is one of the fastest growing countries in the world, and it needs foreign investment to boost its growth and its infrastructure.
So if you live in Bali or anywhere else in Indonesia, you can help build the country that welcomes you, AND get 0% tax in return, which is a pretty great deal.
You are relatively free in your choice of investment
Tax exemptions sometimes come with a very limited choice of local investment that almost act like a deterrent to the foreign investor.
This is not the case in Indonesia.
From the money market to real estate, you really have a wide range of asset classes you can reinvest your money into for 3 years in order to get the tax break.
The investment remain yours no matter what and can be withdrawn at any time
The dividends you reinvest in Indonesia are yours.
They are not locked in a government account. Your visa doesn’t depend on it. You are free to change your mind at any time.
If you need the money or if you plan on leaving Indonesia, simply withdraw the money, pay the tax you were supposed to pay anyway (10% if you are a resident, 20% if you are not) and you are free to do whatever you want next.
Cons of using the 0% tax scheme for your foreign dividends
Here are the main cons you should be aware of before repatriating your foreign dividends in Indonesia through the Omnibus law.
You have to wait 3 years to be eligible for the tax benefit
Regardless of where you decide to invest your money in Indonesia, you’ll have to wait 3 years before you can claim the tax exemption.
3 years is relatively short for most investments, but it can feel long when you desperately need the money or when you are in a high risk investment that goes wrong.
Your investment is heavily tied to Indonesia and its economy
Of course, your investment is tax-free as long as it’s in Indonesia to finance the Indonesian economy. This means that you will be tied to the Indonesian economy one way or another.
If you are invested in money markets (bonds / stocks), you will be dependent on the performance of these companies or the public finances of the country. If you are in real estate, you might be dependent on real estate prices or tourism demand.
You might not have access to the variety of financial products your offshore brokerage has
Indonesian brokers do not always have investments as varied as some other international brokers, especially the ones located in the US or other countries with a lot of financial products.
That being said, the scheme is mostly for reinvestment. So you can always have a specific asset in your country and only reinvest the byproduct in Indonesia.
Who is a great fit for the tax exemption on foreign dividends in Indonesia?
Here are the main profiles that should seriously consider using the tax treaties to get free tax on foreign dividends in Indonesia.
Foreign pensioners living on dividends
If you plan on living in Bali for your retirement on foreign dividends, then this tax exemption is perfect for you.
All you have to do is carefully plan your cash flow to ensure that you don’t need to withdraw your dividends before the 3 years mark.
If you manage this well, you can receive your dividends from abroad, reinvest them for 3 years in Indonesia and then spend them as you see fit…tax free.
Foreign entrepreneurs living in Bali
If you have a business that runs well in your home country and are living in Bali on your dividends, then this scheme is also very interesting.
You are able to basically live tax-free, as long as your money is reinvested for 3 years in the Indonesian economy.
Anyone with passive income who want to do business / buy real estate in Bali
If you are an entrepreneur in Bali and receive passive income from abroad, the tax exemption scheme on foreign dividends is more than a tax cut.
Instead of relying on other businesses or governments for 3 years to be eligible for your tax exemption, you can directly reinvest your dividends in your Indonesian company as paid-up capital…tax free.
Your company can then do business in Bali or buy real estate.
Foreigners who want to diversify their investments into Indonesia
Compound interest is the 8th wonder of the world. And diversification should probably be 9th.
If you are over invested in your home country, the scheme is great to reinvest your gains into the Indonesian economy tax free, whether through bonds, stocks or real estate.
Conclusion
If you are on the receiving end of dividends coming from outside in Indonesia, you should seriously consider relocating in Indonesia and invest them in the local economy to get a perfect 0% tax rate.
All you have to do is allocate your income in an approved investment (Indonesian government bond, Indonesian stock exchange, Indonesian company paid-up capital, real estate…) for at least 3 years. After that period, you are free to use it tax free.
Get in touch with our team for more information about legal and tax considerations in Bali.
