If you’re a digital nomad who spends a lot of time in Indonesia you need to be aware of the rules regarding Indonesia tax residency.
After speaking to a lot of clients, I see there are many misunderstandings about what this means in practice.
Overview of Tax Residency in Indonesia
- One can easily qualify as Indonesian tax resident based on the three criteria the tax authorities apply
- Indonesian tax residents have to pay tax on their worldwide income
- Indonesia applies progressive tax rates
- Foreign income is also subject to the same rates
Tax Benefits of Being a Tax Resident of Indonesia
Indonesia isn’t really a tax haven.
It applies worldwide taxation and has progressive income tax rates.
Opening a company in Indonesia could make sense though although there are still more tax efficient options out there.
Taxes in Indonesia
Let’s take a closer look at the different taxes that can apply to you if you have your Indonesia tax residency.
Personal Income Tax Rates
First of all, it’s important to note that as an Indonesian tax resident you have to pay tax on your worldwide income.
I often hear stories from nomads who claim to know that they shouldn’t pay tax because they only work for foreign clients. Unfortunately, this is completely wrong.
Indonesia does tax your income irrespective if it comes from a local or foreign source.
Indonesia applies progressive tax rates:
- <60 million IDR: 5%
- 60-250 million IDR: 15%
- 250-500 million IDR: 25%
- 500 million – 5 billion IDR: 30%
- >5 billion IDR: 35%
These tax rates apply to all income unless stated otherwise.
Types of income that fall under these rates are professional income, capital gains and dividends from foreign companies.
Dividends from Indonesian companies are subject to a 10% final withholding tax.
However, dividends in general – both from local and foreign source – can be exempted from tax if reinvested in Indonesia and you obtain approval from the tax authorities.
Social Contributions in Indonesia
Social contributions are mandatory for employees working for local employers.
There are two types of contributions:
- Health insurance:
- Employer: 4%
- Employee: 1%
- Maximum salary for calculation: 12.000.000 IDR per month
- Employment protection:
- Employer: 6,24-7,74% (depending on sector)
- Employee: 3%
- Also here a maximum salary cap can apply to part of these contributions but these depend on the situation
Company directors who don’t receive a salary don’t have to pay social contributions.
If you do receive a salary as the director, the same rates as for employees apply.
Freelancers do have to pay social contributions but can decide between different categories themselves.
The highest category for freelancers only requires a payment of 150.000 IDR per month.
Indonesian Corporate Tax Rates
The general corporate tax rate in Indonesia is 22% on their profit.
Nevertheless, special rates and regimes apply for small companies (i.e. companies with a turnover up to 50 billion IDR).
Small companies only pay 11% on their taxable income coming from their first bracket of turnover up to 4,8 billion IDR.
An any income above they pay the normal tax rate of 22%.
Furthermore, Indonesia also offers a final tax regime for micro-businesses (i.e. businesses with a turnover up to 4,8 billion IDR). They can pay tax on their turnover instead of on their profit for a certain period of time. The applicable rate is 0,5%.
Unfortunately, the law excludes businesses providing personal services (e.g. consultants). Therefore, it doesn’t apply to most digital nomads.
As already mentioned, an Indonesian company also has to withhold a withholding tax of 10% on dividends it pays out.
Requirements to Become a Tax Resident in Indonesia
You can become a tax resident in Indonesia in three ways:
- Days test: spend 183 days in Indonesia during any 12 month period
- Residency: reside in Indonesia (e.g. home available)
- Intention: be present in Indonesia throughout the year and have the intention to reside there (e.g. applying for long-term visa)
It’s sufficient to meet one of the criteria to qualify as an Indonesian tax resident. Therefore, you can fairly quickly qualify as one.
Accordingly, many digital nomads spending there time in Bali and other places in Indonesia qualify as a digital nomad without realizing it or paying attention to the consequences.
Obviously, we all know the story that say that as a foreigner you don’t need to worry about taxes in Indonesia. This might have been true in the past but the Indonesian tax authorities are cracking down on this so it’s better to be safe than to be sorry.
How to Establish Tax Residency in Indonesia?
Let’s have a look at how you can establish tax residency in Indonesia.
Meet Tax Residency Requirements
The first step is to meet at least one of the three criteria for qualifying as a tax resident discussed above.
This means you need to spend at least 183 days in the country or have the intention to reside in Indonesia.
Obtain Tax Number
If you qualify as a tax resident it’s important to apply for a Tax Identification Number (NPWP) which you can get from the Directorate General of Taxes.
File Tax Return
If you qualify as an Indonesian tax resident and got your tax number you are ready to file your tax return (SPT Tahunan).
You need to file your tax return by 31 March for the previous financial year.
In the tax return you will need to report your worldwide income.
My Tax Perspective on Getting Tax Residency in Indonesia for Nomads and Expats
From a pure tax perspective, Indonesia tax residency is probably not in my list of best options.
The reason being that you’ll fairly quickly end up in the 30% tax bracket if you earn income on a Western level.
If you open a local company, you could lower that to around 20%. Yet, even for that rate there might be better options out there.
Nevertheless, if you spend significant time in Indonesia, you probably won’t have any other option than opting for tax residency in Indonesia.
How is Indonesia for Digital Nomads?
Indonesia – and especially Bali – is the cradle of digital nomads.
That’s no surprise as it offers something for everyone. Whether you are in a party mood and looking for an active nightlife or whether you look for the calmness of nature and meditation. Moreover, there are plenty of coworking and coffee shops to work from.
And, not unimportant, you get all of this at an affordable cost.
Furthermore, Indonesia now also has the Indonesia Digital Nomad Visa or Remote Worker KITAS. This visa enables you to stay up to six years in Indonesia so you don’t have to worry about visa runs anymore.
For all these reasons, it’s no surprise many digital nomads visit it or even set up their base there.
Need Further Help? Work With Me!
You want to see how tax residency in Indonesia impacts your situation or what could be a good alternative? Reach out!