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Hong Kong, Indonesia DTA Comes Into Force

by Mary Swire,, Hong Kong

17 April 2012

It has been announced that the agreement for the avoidance of double taxation (DTA), signed between Hong Kong and Indonesia on March 23, 2010, came into force on March 28 this year, after the completion of ratification procedures on both sides.

The DTA will eliminate double taxation instances encountered by Hong Kong and Indonesian investors, and, it is hoped, will help foster closer economic and trade links between the two places.

Before the entry into force of the DTA, profits of Indonesian companies doing business through a permanent establishment, such as a branch, in Hong Kong have been fully taxed in both places. Under the agreement, double taxation is avoided in that any Hong Kong tax paid by Indonesian companies will be allowed as a deduction from the tax payable in respect of the same income in Indonesia.

In addition, the income received by a Hong Kong resident from non-Indonesian employment exercised in Indonesia will be exempted from Indonesian income tax if his aggregate stay in any relevant 12-month period does not exceed 183 days, and vice versa.

Hong Kong residents receiving dividends from Indonesia, not attributable to a permanent establishment there, have been subject to an Indonesian withholding tax, which is currently at 20%. Under the agreement, this will be reduced to 10%. If the recipient is a company holding at least 25% of the share capital of the paying company, the withholding tax rate will be further reduced to 5%.

Hong Kong residents receiving royalties from Indonesia have been subject to a withholding tax of 20% in Indonesia. Under the agreement, the withholding tax on royalties will be capped at 5%. The Indonesian withholding tax on interest paid to Hong Kong residents will also be reduced from the current rate of 20% to 10%.

Furthermore, both sides have also agreed to allow Hong Kong airlines operating flights to Indonesia to be taxed at Hong Kong's corporation tax rate, which is lower than Indonesia's. Profits from international shipping transport earned by Hong Kong residents that arise in Indonesia, which have been subject to tax there, will enjoy a 50% reduction in tax under the DTA.

The DTA also includes the prevailing international Organisation for Economic Co-operation and Development standard on exchange of tax information, and will have effect in Hong Kong for any year of assessment beginning on or after April 1, 2013.

TAGS: individuals | tax | business | royalties | corporation tax | tax rates | withholding tax | Hong Kong | Indonesia | dividends | individual income tax

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