Permanent Establishment in Indonesia and Hiring Staff via EOR
Permanent establishment in Indonesia: how a foreign company creates one, what follows, and where hiring through an employer of record fits.
- UU PPh (Income Tax Law), Article 2(1a), 2(3)(b), 2(4) and 2(5), as amended by UU No. 6 Tahun 2023, and its elucidation — what a permanent establishment is and the forms it takes
- UU PPh, Article 17(1)(b) as amended by UU No. 7 Tahun 2021 — the corporate rate from tax year 2022
- UU PPh, Article 26(4) as amended by UU No. 6 Tahun 2023 — branch profit tax
- PMK No. 35/PMK.03/2019 (1 April 2019), Articles 2–9 — registration, the place of business, treaty cases, construction projects, the services test and dependent agents
- PMK No. 14/PMK.03/2011, Articles 1 and 5 — branch profit reinvested in Indonesia, and the treaty rate
A permanent establishment in Indonesia (bentuk usaha tetap) is how a foreign company with no Indonesian company can still be taxed here on the business it carries on in Indonesia. The definition sits in the Income Tax Law itself, Article 2(5), as amended by Law No. 6 of 2023 (UU 6/2023). The Minister of Finance’s regulation on determining a permanent establishment, PMK No. 35/PMK.03/2019, sets out the detail.
Hiring through an employer of record (EOR) settles who employs your team. Whether a foreign company has a permanent establishment turns on what the company itself does in Indonesia, and that is what this article explains.
What a permanent establishment in Indonesia is
The Law treats a permanent establishment as a taxpayer in its own right, taxed in the same way as a company (Article 2(1a)). The foreign company behind it remains a non-resident; the permanent establishment stands in for it on the tax owed here (elucidation of Article 2(4)).
Article 2(5) lists the forms one can take, such as a place of management, a branch, an office or a warehouse. It also covers construction projects, services provided for more than 60 days in 12 months, and a dependent agent.
The common ways a foreign company creates one
A fixed place of business
A place counts when the foreign company uses it continuously, at a fixed location, for its business. Ownership is not the test: a rented place counts in the same way (PMK 35/2019, Article 5(2)–(4)).
Services for more than 60 days
Services that the foreign company’s own people, or people it engages, provide in Indonesia for more than 60 days in any 12 months create a permanent establishment (Income Tax Law, Article 2(5)(m); PMK 35/2019, Article 8).
An agent who is not independent
Someone who acts for a foreign company and takes its instructions, or carries no business risk of their own, is a dependent agent (PMK 35/2019, Article 9(2)). An independent agent acting in its own business is not (Article 9(3)).
A construction, installation or assembly project
Under Indonesian law, a project of this kind, including design and supervision work, is a permanent establishment with no minimum duration (PMK 35/2019, Articles 4(2)(a) and 7(2)–(3)).
Where a tax treaty applies
If the foreign company’s home country has a tax treaty with Indonesia, the treaty’s own time periods take the place of the 60 days for services and set the minimum length for a project. A place used only for preparatory or auxiliary work is then excluded (PMK 35/2019, Articles 6, 7(4) and 8(2)).
What follows once one exists
- A tax number. A permanent establishment registers for an NPWP (Nomor Pokok Wajib Pajak) within one month of starting business in Indonesia (PMK 35/2019, Article 2(3)). The number itself is explained in the 16-digit NPWP.
- Corporate income tax at 22% (Income Tax Law, Article 17(1)(b), from tax year 2022).
- Branch profit tax of 20% on the profit left after corporate tax, unless it is reinvested in Indonesia or a treaty sets a lower rate (Article 26(4); PMK 14/PMK.03/2011, Articles 1 and 5).
- Value added tax, once its taxable sales pass the small-business limit (PMK 35/2019, Article 3). The steps are in VAT registration.
Each of these has its place in Indonesia’s tax system.
How an employer of record fits
Through EOR, the foreign client does not employ anyone in Indonesia itself. MAM is the legal employer, and we look at each client’s activities in Indonesia so the arrangement stays that way.
MAM holds the employment contract, runs payroll with the income tax on employees’ pay (PPh 21), and registers your team with BPJS (Badan Penyelenggara Jaminan Sosial), Indonesia’s health and employment social security. You direct the work day to day, as you would with anyone on your team. What the arrangement covers is set out on the employer of record service page.
A permanent establishment is a question about a company’s activities as a whole: where it works from, what it delivers in Indonesia and for how long, and who acts on its behalf.
Those are the points we review with every client as their plans develop, alongside the employment itself.
When your own company becomes the better route
Some plans point towards a company of your own: taking an office or warehouse, or delivering services and running projects in Indonesia as part of the business. Each of these is among the forms a permanent establishment can take.
A PT PMA, a foreign-owned limited liability company, is an Indonesian resident company (Income Tax Law, Article 2(3)(b)). It is taxed as a company in its own right, so branch profit tax does not apply to it.
Most EOR clients move to their own entity once headcount justifies it, and MAM handles the PT PMA setup. Your team then moves across, as described in moving from EOR to your own company.