The prevention of double taxation has long been a fundamental pillar of Indonesia’s international tax policy, particularly in the context of cross-border investment, international trade, and the free movement of capital. To this end, Indonesia has concluded numerous Double Taxation Avoidance Agreements (Tax Treaty) with its treaty partners, which serve to allocate taxing rights, mitigate tax barriers, and enhance legal certainty for taxpayers engaged in cross-border transactions. However, the practical implementation of treaty benefits has raised administrative and compliance challenges, particularly with respect to ensuring that such benefits are granted exclusively to taxpayers who satisfy the applicable treaty conditions, align with the underlying intent of the treaties and prevent illegal tax avoidance.

In response to these challenges, the Government of Indonesia, through the Ministry of Finance, has issued a new regulation, namely Minister of Finance Regulation No. 112 of 2025, which governs the procedures for the implementation of benefits under the Indonesia’s Tax Treaty (Regulation 112/2025). 

Scope of Regulation

Regulation 112/2025 governs the application of Tax Treaties in Indonesia. It applies to Indonesian resident taxpayers with foreign-sourced income and non-resident taxpayers with income from Indonesian sources. While the Income Tax Law is the primary tax basis, Regulation 112/2025 clarifies conditions for overriding domestic law, i.e. (i) they must be a resident of a Tax Treaty partner jurisdiction, (ii) they must fall within the treaty’s scope, (iii) they must genuinely control and enjoy the income, and (iv) the treaty benefits must not be abused. 

Types and Benefits of Tax Treaty

Regulation 112/2025 reaffirms several forms of Tax Treaty benefits, including reduced withholding tax rates, exclusive taxing rights in the state of residence, exemptions from Indonesian income tax, and treaty-specific rules on Permanent Establishment. These benefits must be applied strictly in accordance with the object and purpose of the relevant Tax Treaty. Any application of treaty benefits that exceeds or contradicts treaty intent may be denied.

Limitation on Benefits

Regulation 112/2025 sets the limit on benefits that determines eligibility for treaty benefits. To qualify, recipients must meet at least one criterion: being a tax resident of the treaty partner country or a legal entity with sufficient linkage, such as majority ownership by treaty partner residents or over 50% of income not paid to non-applicable parties. Treaty benefits may also be available to publicly listed companies with more than 50% of their shares regularly traded on a recognized stock exchange. . 

Simplified DGT Form & Change of Terminology

A non-resident taxpayer who wishes to apply a reduced withholding tax rate or obtain tax exemption under the Tax Treaty benefits must submit a Certificate of Domicile using a form prescribed by the DGT. Regulation No. 112/2025 introduces a simplified version of the DGT Form compared to the previous form regulated under Director General of Taxes Regulation No. PER-25/PJ/2018. Previously, taxpayers were required to complete seven sections, whereas the new DGT Form consists of only six sections, due to the consolidation of questions relating to the substance test and beneficial ownership (previously set out in Part VI, now combined into Part V of the form). Part V of the form must be completed only if the income recipient is a non-individual.

Furthermore, the updated DGT Form under Regulation No. 112/2025 also introduces several new terms. These terminology changes are intended to align the form with internationally accepted standards. Under the new form, the terminology used includes: (i) “Double Taxation Agreement”, replacing the previously used term “Double Taxation Convention”; and (ii) “Country/Jurisdiction” for identifying the relevant tax jurisdiction, replacing the former term “Country”.

Authority of DGT to Conduct Testing

The regulation gives the DGT the authority to review whether tax treaty benefits are applied correctly and not abused. The DGT may examine withholding tax practices to ensure that reduced tax rates under a tax treaty are granted only to eligible taxpayers. Tax treaty benefits can be denied if the foreign taxpayer is not the real recipient of the income (beneficial owner) or if the structure is mainly used to avoid tax. To qualify as a beneficial owner, a foreign taxpayer must genuinely control and enjoy the income and must not merely act as an agent, nominee, or conduit. If treaty conditions are not met, the tax will be imposed based on the higher rates under domestic income tax law.

Anti-Treaty Abuse Provisions

Under Regulation 112/2025, tax treaty benefits can be denied if a structure or transaction is mainly created to reduce, avoid, or delay tax, rather than to support real business activities. This means having the right documents alone is not enough—the tax authority will look at the real purpose and substance of the arrangement. The key focus is whether the foreign taxpayer is the beneficial owner of the income. The tax authority may also use tests like the principal purpose test, which asks if obtaining treaty benefits was a primary reason for setting up the structure. This approach targets treaty shopping, shell or conduit companies, and artificial arrangements involving third countries.

Dividend Provisions and Reduced Withholding Tax Rates

Dividend income paid by an Indonesian company to a foreign shareholder is generally subject to withholding tax under Indonesian law. However, a tax treaty may allow a lower withholding tax rate if certain conditions are met. Regulation 112/2025 makes clear that this lower rate is not automatic and can only be applied if the foreign company truly qualifies for treaty benefits.

To use the reduced dividend tax rate, a foreign shareholder must (a) meet the minimum shareholding percentage in the tax treaty and hold the shares for at least 365 days, including the dividend payment date and (b) be the real owner of the dividend income. If any condition is not met, the higher tax rate under the treaty or domestic tax rate applies. .

Permanent Establishment

Regulation 112/2025 significantly strengthens Indonesia’s approach to determining Permanent Establishment status. The regulation clarifies that activities traditionally characterized as preparatory or auxiliary are not automatically excluded from Permanent Establishment determination. Instead, DJP is authorized to assess the substance, function, and economic contribution of those activities conducted in Indonesia. 

Certain activities may give rise to a Permanent Establishment where they play a meaningful role in income generation, support or are closely linked to the enterprise’s core business, or constitute an integral part of the group’s overall value creation process. The focus shifts from the formal classification of activities to their commercial significance within the business model.  

Regulation 112/2025 allows the tax authority to consider related business activities together, even if separated, when they aim to avoid creating a Permanent Establishment. Arrangements involving agents will be closely reviewed, especially if they frequently sign contracts or play a key role in their approval. This rule focuses on actual activities, not just contract terms, and aligns with international standards for preventing artificial Permanent Establishment avoidance..

Author’s Remarks 

Regulation 112/2025 confirms Indonesia’s shift toward a substance-based approach in applying tax treaties. Tax treaty benefits are no longer based only on formal documents, but on real business purpose, economic activity, and value creation. Taxpayers and withholding agents should carefully review their structures and transactions to ensure they reflect genuine commercial substance and comply with treaty intent.

For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia
maser@metalaw.id