Definition of PPh Article 26
PPh Article 26 is an income tax withheld on Indonesia-sourced income received or earned by foreign taxpayers (Wajib Pajak Luar Negeri, or WPLN) other than a permanent establishment (BUT). Withholding is performed by government bodies, Indonesian tax residents, event organizers, permanent establishments, or representatives of foreign companies in Indonesia that pay income to WPLN.
The withholding is final for most categories of income, meaning the foreign taxpayer's Indonesian tax obligation on that income is settled at the moment of withholding. The WPLN does not need to file an Indonesian annual tax return for income that has been finally withheld.
Legal Basis
- Law Number 7 of 1983 on Income Tax, as last amended by Law Number 7 of 2021 (UU HPP), Article 26.
- Director General of Taxes Regulation PER-25/PJ/2018 on the Application of Tax Treaties (P3B).
- Ministry of Finance regulations on collection, deposit, and reporting of PPh Article 26.
- Tax treaties (P3B) between Indonesia and partner jurisdictions.
Subject and Withholder
The withheld party is a foreign individual or entity receiving income from Indonesia, other than a permanent establishment. A foreign individual is a person not domiciled in Indonesia or present for not more than 183 days within any 12-month period. A foreign entity is one not established or domiciled in Indonesia.
The withholder may be: a government body, Indonesian tax resident (individual or entity), event organizer, permanent establishment, or representative office of a foreign company making payments to foreign taxpayers.
Objects and Rates
The standard rate is 20% on gross income. Objects span income from capital, services, activities, prizes, and other categories. The table below summarizes the main objects under Article 26 paragraphs (1), (2), (2a), (4), and (5):
| Income Type | Rate | Tax Base |
|---|---|---|
| Dividends, interest, royalties, rent, service fees | 20% | Gross income |
| Prizes, awards, pensions, swap premiums, debt forgiveness gains | 20% | Gross income |
| Sale of Indonesian-located assets by WPLN (non-BUT) | 20% | Deemed net income (25%), effective 5% |
| Insurance premiums paid to foreign insurers | 20% | Deemed net income (10% or more) |
| Sale of unlisted Indonesian PT shares by WPLN | 20% | Deemed net income (25%), effective 5% |
| Taxable income of BUT after corporate income tax (branch profit tax) | 20% | Net profit after tax |
These rates apply where no tax treaty exists. With a valid treaty and qualifying taxpayer status, treaty rates may apply.
Tax Treaty and SKD WPLN
To claim a lower treaty rate, the WPLN must provide a Certificate of Domicile (Surat Keterangan Domisili, or SKD) to the Indonesian withholder. The SKD is issued by the WPLN home tax authority and must be supplied before withholding. Without a valid SKD, the domestic 20% rate applies.
Procedural requirements are set out in PER-25/PJ/2018. The WPLN must also satisfy the beneficial owner test for dividends, interest, and royalties. If the WPLN is a conduit company without economic substance, treaty benefits may be denied.
How to Withhold and Pay
- Compute the tax: 20% (or treaty rate) of gross income.
- Withhold at the time of payment or when the income becomes due, whichever is earlier.
- Deposit the tax to the state treasury by the 10th of the following month using e-SSP via Coretax or an authorized bank.
- Issue an electronic PPh Article 26 withholding certificate to the WPLN.
- File SPT Masa PPh Article 26 by the 20th of the following month via Coretax.
Worked Example
PT Cakrawala Indonesia pays a software royalty of USD 100,000 to Acme Ltd, a Singapore tax resident.
Scenario 1: no SKD. Withheld tax = 20% x USD 100,000 = USD 20,000. PT Cakrawala remits USD 20,000 (at the official MoF exchange rate) and Acme receives USD 80,000.
Scenario 2: valid SKD and Acme is the beneficial owner. Under the Indonesia-Singapore tax treaty, the royalty rate is capped at 10%. Withheld tax = 10% x USD 100,000 = USD 10,000. Acme receives USD 90,000.