On 30 July 2015 the Netherlands and Indonesia signed an amending protocol to the Netherlands-Indonesia tax treaty of 29 January 2002. After completion of domestic ratification procedures by both countries, the protocol enters into force on 1 August 2017 and will be effective as of 1 October 2017. Changes to withholding tax rates will apply as of that date.
The protocol will provide more clarity and certainty with respect to one of the most attractive and competitive tax treaties entered into by Indonesia.
The revised tax treaty provides for, inter alia, withholding tax (“WHT”) rates which are the lowest available.
The revised Netherlands-Indonesia tax treaty is one of the most attractive and competitive tax treaties entered into by Indonesia and provides a clear opportunity when making inbound investments into Indonesia.
The key aspects of the revised tax treaty are as follows:
- Dividend WHT rate from 10% to 5%The taxation of (gross) dividends by the source state is reduced from the current 10% to 5%, provided the shareholder holds at least 25% of the capital of the distributing company. If the 25% ownership threshold is not met a dividend WHT rate of 15% will apply. The current 10% rate remains available if the beneficial owner of the dividends is a pension fund. The 5% reduced WHT rate is the lowest dividend WHT rate for tax treaties concluded by Indonesia and this is the only treaty that provides for both a 5% dividend and interest WHT rate.It is noted that for inbound investments into the Netherlands, shareholders in treaty jurisdictions (such as Indonesia) may even enjoy a 0% domestic dividend WHT rate as a consequence of the recently proposed Dutch domestic dividend WHT exemption (see also our Tax Flash of 18 May 2017).
- Interest WHT rate from 0% to 5%Interest on loans with a term of more than two years is currently not subject to WHT, if the lender is a resident of the other state. The revised treaty, however, provides for taxation in the source state of up to 5% of such interest. For loans with a term of less than two years the current 10% WHT rate remains applicable.Even though the WHT rate increases, the 5% rate on interest is the most competitive WHT rate for tax treaties concluded by Indonesia.
- Royalties WHT rate remains at 10%There are no changes with respect to the WHT rate on royalties, which remains at 10%.
Application of tax treaties is generally done by providing a certificate of residency, signed by the relevant authorities of the country of residence. Indonesia uses the so-called DGT-1 form for this purpose. This form includes a number of questions, aimed at identifying whether the foreign recipient is the beneficial owner of the Indonesian sourced income.
The amended treaty now confirms that both states will adhere to the definition of ‘beneficial ownership’, as used within an OECD context. From the Indonesian side no announcements have been made whether the DGT1 form will be amended, or whether this form will continue to be required, for Dutch parties receiving Indonesian sourced income.
No specific and/or general anti-abuse measures were included in the tax treaty. However, the treaty will be affected when the multilateral instrument (MLI) becomes effective since the Netherlands and Indonesia signed the MLI. For more information on the MLI, please see our Tax Flashes of 8 June 2017 and 25 November 2016.