Tax Jakarta Client Alert November 2015 Minister of Finance eliminates double taxation on Real Estate Investment Trusts Recent Development On 10 November 2015, the Minister of Finance issued Regulation No. 200/PMK.03/2015 on the Tax Treatment of Taxpayers and Taxable Entrepreneurs That Use a Certain Collective Investment Contracts Scheme for the Finance Sector ("MOF Regulation 200"). The regulation became effective on the same day. Under this regulation, the Minister of Finance provides several tax facilities to Real Estate Investment Funds (commonly known as Real Estate Investment Trusts/"REIT"). Implications for Investors Previously, investors were reluctant to invest in Indonesia under REIT schemes. This was because REIT, especially REIT with special purpose companies, were subject to double taxation. A REIT was subject to tax when its special purpose companies received income from transfers of assets or rent (a transfer of land and buildings is subject to 5% income tax of the gross transaction value, and income from rental of land and buildings is subject to 10% income tax of the gross rental fee). A REIT was also subject to tax when its special purpose companies distribute dividends to the REIT. Under MOF Regulation 200, from 10 November 2015, the double taxation is eliminated. This will mean a significant reduction of tax costs for investors under REIT schemes in Indonesia What the law says Under MOF Regulation 200, REIT is defined as a vehicle to collect funds from investors for subsequent investment in real estate and real estate-related assets, and cash or cash equivalents. A special purpose company is defined as a limited liability company whose shares are 99.9% owned by a REIT that is established in the form of a collective investment contract where that special purpose company is incorporated solely for the purpose of administering the REIT. Exemption from tax on dividend The first facility provided in the regulation is that dividends received by investors under a REIT from special purpose companies are no longer subject to tax. This is because special purpose companies established to administer a REIT are treated as an integral and inseparable component of the REIT. Tax 2 Minister of Finance eliminates double taxation on Real Estate Investment Trusts November 2015 There are certain administrative requirements for a REIT in Indonesia to be entitled to the exemption from tax on dividends. The REIT must attach the following documents to the corporate income tax return for the fiscal year when the dividend is received: a) a copy of the notification on the registration of the REIT issued by the Financial Services Authority (Otoritas Jasa Keuangan); b) a statement from the Financial Services Authority that the taxpayer is a special purpose company of a REIT; and c) a statement that the special purpose company is only for REIT purposes. Transfer of real estate to the REIT Under normal circumstances, a transfer of land and buildings will be subject to 5% final income tax. A transfer of real estate to a special purpose company under a REIT scheme is not considered to be subject to 5% final withholding tax but any gain from the transfer of the real estate to the REIT would be subject to the normal income tax calculation The REIT can be considered as a low risk taxable entrepreneur The last facility under MOF Regulation 200 is that a special purpose company under a REIT scheme can be considered as a low-risk taxable entrepreneur, which means it can obtain a pre-audit VAT refund. To be considered as a low risk taxable entrepreneur, the REIT must apply to the Director General of Tax, and attach the following documents: a) a copy of the notification on the registration of the REIT issued by the Financial Services Authority (Otoritas Jasa Keuangan); b) a statement from the Financial Services Authority that the taxpayer is a special purpose company of a REIT; and c) a statement that the special purpose company is only for REIT purposes. If a REIT has obtained a decision as a low risk taxable entrepreneur, it is entitled to apply for pre-audit VAT refunds, for which certain procedures must be followed. Actions to consider Before applying for the facilities, investors should ensure that they have got all the administrative documents. Before requesting a pre-audit VAT refund, the REIT has to consider the pros and cons of a pre-audit VAT refund. If after the refund the tax authority conducts an audit and finds that there is an underpayment, the taxpayer would be subject to a surcharge of 100% of the underpaid amount. www.hhp.co.id For further information please contact Ponti Partogi Partner +62 21 2960 8888 email@example.com Ria Muhariastuti Senior Associate +62 21 2960 8574 firstname.lastname@example.org Nalphian Seotang Associate +62 21 2960 8565 email@example.com Hadiputranto, Hadinoto & Partners The Indonesia Stock Exchange Building, Tower II, 21st Floor Sudirman Central Business District Jl. 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