The Tax Treatment of Dividends Received by LPI Partners 

JAKARTA, DDTCNews – The government specifically regulates the tax treatment of income in the form of dividends received by partners of the Indonesia Investment Authority (INA/Lembaga Pengelola Investasi, hereinafter referred to as LPI).

These provisions on dividends are outlined in Government Regulation (Gov. Reg.) 49/2021 concerning the Tax Treatment of Transactions Involving LPI and/or Entities Held by LPI. This regulation was promulgated on 2 February 2021.

“Cooperation between LPI and third parties ... and funds, that do not fulfil the provisions as resident corporate tax subjects, the tax treatment shall be implemented pursuant to statutory tax provisions,” reads a fragment of Article 8 of the Gov. Reg. quoted on Monday (22/2/2021).

There are two groups of income in the form of dividends received or accrued by third parties in connection with the cooperation with LPI. Both are income tax objects. First, dividends sourced from repayments due to liquidation exceeding the amount of paid-up capital or the initial investment value.

However, pursuant to the provisions under Gov. Reg. 49/2021, to income in the form of dividends due to liquidation received by third parties for non-resident tax subjects (SPLN) cooperating with LPI is direct and the entities or form of cooperation constitutes a resident corporate tax subject, 2 provisions shall apply.

The first provision is that dividends do not constitute income tax objects insofar as they are invested or used to support other businesses within the territory of the Republic of Indonesia within 3 years from the time the dividends are received or accrued.

The second provision is that dividends are subject to a final income tax of 7.5% or according to the rates stipulated under the tax treaty. This provision applies if the dividends are not invested or not used to support other businesses in the Unitary State of the Republic of Indonesia for a minimum of 3 years since the dividends are received or accrued.

On the other hand, income in the form of dividends due to liquidation received by third parties for resident tax subjects (SPDN) is excluded as a taxable object as referred to in Article 4 paragraph (3) subparagraph f of the Income Tax Law as amended by the Job Creation Law.

Second, other dividends in whatever name and form. Dividends in this group are the share of profits accrued by shareholders. The said dividends include the distribution of net income, either directly or indirectly, in whatever name and form.

Next, repayments due to liquidation exceeding the amount of paid-up capital. There is also the distribution of bonus shares without deposit, including bonus shares sourced from the capitalisation of share premiums.

Further, the distribution of profits in the form of shares and the recording of additional equity without deposit. There is also an amount that exceeds the amount of paid-up shares received or accrued by shareholders due to the buyback of shares by the company concerned.

Next, repayments of all or part of the paid-up capital. This occurs if, in past years, a profit was accrued unless the repayments were the result of a legal reduction of the statutory capital.

There are also payments in respect of profit indicators, including those received in exchange for the said profit indicators. Further, company expenses for the personal needs of shareholders expensed as company costs.

However, pursuant to the provisions under this Gov. Reg., other dividends received by third parties for non-resident tax subjects are subject to a final income tax of 7.5% or according to the rates stipulated under the Tax Treaty. The imposition of final income tax applies if the cooperation with LPI is direct and the entity or form of cooperation is a resident corporate tax subject.

Other dividends received by third parties for resident tax subjects are excluded from taxable objects as referred to in Article 4 paragraph (3) subparagraph f of the Income Tax Law as amended by the Job Creation Law.

The income tax is final, withheld by the entity or the form of cooperation between LPI and third parties. Withholding is performed at the end of the month income is paid, apportioned to be paid or when the income payment is due.

“Depending on whichever event occurs first,” reads a fragment of Article 12 paragraph (4) of the Gov. Reg. 

The costs to obtain, collect and maintain income, both dividends due to liquidation and other dividends in whatever name and form, cannot be expensed as deductible expenses.

On a side note, LPI is authorised to cooperate with third parties. The said third parties include investment partners, investment managers, State-Owned Enterprises and other entities, both domestic and overseas.

Cooperation with third parties is carried out through the granting or receipt of management authority, establishment of joint ventures or other forms of cooperation.