Background
A tax on the ‘gains’ (profits) of sale of shares of Domestic Limited Liability Companies (“Domestic Company”) which is conducted by a Foreign Taxpayer, where the company is not the issuer or Public Company, is specifically regulated in the Decree of Minister of Finance of Republic of Indonesia Number: 434/KMK.04/1999 on Income Tax Deduction Article 26 on Income Received or Earned by Foreign Taxpayer besides Permanent Establishment on Gains of Sale of Shares (“Decree of Minister of Finance No. 434/KMK.04/1999”)
The purpose of the issuance of the Decree of Minister of Finance No: 434/KMK.04/1999 is to provide a certainty regarding the tax upon the income which is received and earned from Foreign Taxpayer besides Permanent Establishment from the sale of shares of Domestic Company, which is income tax withholding of 20% (twenty percent) of the income.
Tax Provisions for Foreign Taxpayer
Article 2 paragraph (2) of the Decree of Minister of Finance No. 434/KMK.04/1999 set that, for Foreign Taxpayer who is domiciled in Countries that already has a Double Taxation Avoidance Agreement (“DTAA”) with Indonesia then, the aforementioned tax withholding is only conducted if based on applicable DTAA, the right to tax is on the Indonesian side. This DTAA is also known as the Tax Treaty, Tax Convention, and Double Tax Agreement or Double Tax Treaty. The DTAA is generally a bilateral agreement of two countries on how to regulate the taxation having an international dimension of the two countries that did the agreement in order to avoid a double taxation.
On the income of sale of Company’s shares which is earned by Foreign Taxpayer is withheld of 20% (twenty percent) from the estimated net income, the estimated net income is derived from a calculation of 25% (twenty five percent) from the selling price, thus the amount of Income Tax Article 26 is 20% x 25% or 5% (five percent) from the selling price.
The payment of income tax is final that means when the income from sale of Company’s shares is withheld, then the tax obligation is completed.
Recordation of the Deed of Transfer of Shares
The sale of shares of Domestic Company which is conducted by Foreign Taxpayer, the procedures of transfer of shares is under the Law Number 40 of 2007 on Limited Liability Companies (“Company Law”) and the related regulations of tax of sale of Domestic Company’s shares by Foreign Taxpayer that is Decree of Minister of Finance No. 434/KMK.04/1999.
The sale of Company’s shares is performed with the deed of transfer of shares, either by notarial deed or a private deed. According to Article 56 paragraph (2) and (3) of Company Law, the deed of transfer of such rights or its copy must be delivered in writing to the Company. Then, the Board of Directors is required to record transfer of rights on shares, date and day of transfers of rights in shareholder register or special register.
However, since Article (3) paragraph (2) the Decree of Minister of Finance No. 434/KMK.04/1999 specifically regulates the recordation of deed of transfer of Domestic Company’s shares which is performed by Foreign Taxpayer, it is regulated that the transfer of shares of Domestic Company cannot be recorded in the shareholder register and special register before the Foreign Taxpayer paid in full the income tax rate of 20% of estimated net income by submitting a photocopy of proof of income tax withholding by showing the original copy. Article 3 of paragraph (3) the Decree of Minister of Finance No. 434/KMK.04/1999 regulates if the purchaser is a Foreign Taxpayer, the company will be the party to withhold the tax payment.
Sofie Widyana P.
