Family Office: Between Investment Magnet and Tax Erosion Risk
Amidst global competition to attract investments and stated capital, the government frequently faces a classic dilemma: whether to provide incentives to draw funds into the country or to ensure that such facilities do not give rise to the risk of base erosion.
Recently, the government has accommodated the establishment of a financial centre through Article 248 of Law 4/2026. One of the plans being developed within that financial centre is to accommodate the establishment of family offices, including the relevant tax incentives.
As developments have unfolded, family offices have sparked debate. On the one hand, these facilities are expected to attract funds and economic activity to Indonesia. On the other hand, if granted without proper design and appropriate restrictions, Indonesia's tax basis risks being eroded.
Given that tax incentives in Indonesia have reached IDR400.1 trillion (Directorate General of Economic and Fiscal Strategy/DJSEF, 2024), the provision of facilities for family offices clearly warrants thorough review, weighing both the benefits and the risks.
Pros and Cons of Establishing Family Offices
The establishment of family offices is driven by the growing population of high-net-worth individuals in Asia, which is projected to grow by 38.3% over the period 2023–2028. Meanwhile, assets under management by global family offices amount to approximately USD11.7 trillion.
Should family offices be developed in Indonesia, the expectation is that a fraction of those funds would flow domestically and generate a positive impact on the economy through investment and the creation of a multiplier effect.
From a taxation perspective, the presence of family offices can indirectly broaden the tax basis through the formalisation of assets. Data from JP Morgan (2024) indicate that, globally, family companies using family offices manage assets averaging approximately USD864.6 million.
The majority of family company users of global family offices are ultra-high-net-worth individuals who control approximately USD45 trillion, or 10.6% of total global wealth.
At present, the largest proportion of family offices is located in the European Union, accounting for 65%, whilst the country with the greatest number is Germany at 28% (Asset Global, 2023). In Germany, family offices pay income tax of up to EUR46.8 billion each year, representing 41.7% of total tax revenues. This also demonstrates that family offices can play a significant role in tax revenues when managed appropriately.
In the Indonesian context, a Family Business Survey conducted by PwC in 2021 noted that 72% of businesses in Indonesia are family businesses. In contrast, approximately 19% of family offices are based in Asia (Global Family Office Compensation Benchmark Report, 2023).
These data indicate an opportunity for Indonesia to attract family office activities in Asia whilst simultaneously providing a framework for domestic family businesses to obtain operational ease and more structured asset management.
However, behind this potential benefit, challenges may surface if tax incentive design is not structured appropriately. Misdirected incentives risk create preferential tax facilities, allowing tax avoidance practices.
Kovermann (2019) states that agency conflict within family companies is associated with a tendency towards tax avoidance. A majority shareholder holding significant control may make decisions that benefit the family but potentially diminish the interests of minority shareholders.
Further, owners of family companies who prioritise limited socioemotional wealth (SEW), such as disregarding reputation, tend to view tax aggressiveness as a means of rapidly increasing wealth (Bauweraerts, 2024).
Research published in the International Journal of Entrepreneurial Behavior (2023) also indicates that tax avoidance practices in family companies can occur through various mechanisms, including thin capitalisation.
The risk of tax avoidance may also increase when family companies have political connections. As an example, cases of tax avoidance with a political connection background have been prevalent in China.
Inappropriate tax incentives for family companies also fuel increasingly widespread tax avoidance mechanisms through the exploitation of regulatory loopholes. As a further example, inheritance tax incentives for family companies in Spain were found to increase tax aggressiveness.
It is therefore necessary to ensure that the granting of tax incentives to family offices is subject to adequate regulation. Without such regulation, these facilities could potentially be exploited to transfer assets into certain structures in order to obtain more favourable tax treatment.
Learning from Other Countries
To avoid the risk of tax base erosion, tax incentives should be granted selectively and linked to clear economic contributions. The United Kingdom, for instance, applies a strict General Anti-Avoidance Rule (GAAR), including for family companies.
The UK tax authority prohibits the use of shell schemes that have no substantive purpose in the context of tax avoidance. In assessing the reasonableness of a transaction, the UK employs a double reasonableness test. Over the period 2014–2018, the application of GAAR in the UK succeeded in securing GBP235 million in state revenues.
Indonesia could consider strengthening anti-tax avoidance rules as part of the family office policy design. In addition, incentives provided under the implementing regulations of the Financial Sector Development and Strengthening Law (P2SK Law) should ideally be directed towards genuine economic activities that contribute to the economy and to research.
Singapore, through its 13O and 13U schemes, requires minimum investment thresholds of SGD5 million and SGD50 million, respectively, to qualify for incentives. This policy is aimed at ensuring that incoming funds benefit the domestic economy.
Accordingly, the selection of the financial centre's location also plays a pivotal role. The chosen area should ideally have economic development potential so that the presence of family offices can deliver a broader impact.
Germany also applies the principle of equality of tax burden when granting facilities to family businesses. Certain incentives, such as inheritance tax, carry requirements in the form of operational continuity over a specified period of 5–7 years.
Those requirements are periodically evaluated to assess operational compliance as well as economic contribution to the GDP and the creation of local employment.
In the Indonesian context, tax incentives should ideally be directed specifically at activities that generate economic benefits, such as research and development (R&D) or enhancement of workforce competencies.
The selective granting of incentives may reduce the risk of assets being merely transferred into a family office structure without generating genuine economic activities. In addition, a clear separation between company assets and family assets is necessary to ensure that the facilities provided are not used outside the original policy objectives.
Canada, through its Tax on Split Income (TOSI), even applies a specific tax rate to family members who receive income from a family company. This policy covers dividends, management service fees and interest payments to prevent the diversion of income to family members for the purpose of obtaining a tax advantage.
Ultimately, the success of a family office policy depends not only on the magnitude of the tax incentives granted. Ease of doing business and regulatory certainty may, in fact, be the primary factors in attracting investment.
Tax incentives must be carefully designed. Clear restrictions and requirements are necessary so that the government's objective of establishing a financial centre can be achieved, i.e., attracting investments, strengthening the domestic economy and broadening the tax base.
Family offices are therefore expected to serve as catalysts for economic growth, rather than creating new loopholes in the tax system or functioning as a tax haven. (rig)
* This opinion article represents the personal views of the author and does not reflect the position of the institution at which the author is employed.
