Concept of Permanent Establishment amidst the Digital Era

Concept of Permanent Establishment amidst the Digital Era

KUP - 27 Apr, 2023 10:04 WIB

Ideatax, Jakarta -- Digitalization has brought many changes to the way humans interact with each other. Digitalization has also brought a significant impact on the economic and financial aspects. Nowadays, one can make transactions with anyone anywhere and anytime. Thus, national boundaries become irrelevant in digital transactions.


Unfortunately, digitalization also brings negative impacts. One of them is the inability of tax authorities to tax cross-border transactions conducted digitally. This condition is caused by the Permanent Establishment (BUT) concept adopted by tax authorities in the world. The BUT concept requires the existence of a building or permanent representative to tax foreign taxpayers.


For example, someone in Indonesia can buy a book from an overseas merchant through an online platform. Unfortunately, the Indonesian tax authority cannot tax the merchant who made the sale because the merchant does not have a representative office or branch in Indonesia. Therefore, the concept of PE that has been introduced since 1909 is no longer relevant in the digital era.


The OECD (2003) defines a PE as a fixed place of business used to conduct a company's business in whole or in part. The term PE itself includes management premises, branches, offices, factories, workshops, mines, oil or gas wells, quarries, or others. In addition, buildings, construction projects and installations that are more than twelve months old and agents or representatives of the company are also included in the concept of PE.


In Indonesia, the concept of PE is regulated in Article 2 of Law Number 7 Year 1983 on Income Tax as amended by Law Number 7 Year 2021 on Harmonization of Tax Regulations. According to the regulation, BUT is defined as a form of business used by individuals who do not reside in Indonesia, individuals who are in Indonesia for no more than 183 (one hundred eighty-three) days within a period of 12 (twelve) months, and entities that are not established and have no domicile in Indonesia to conduct business or carry out activities in Indonesia, which can be in the form of a PE:

  • the place of management;

  • branch of the company;

  • representative office;

  • office building;

  • factory;

  • workshop;

  • warehouse;

  • space for promotion and sales;

  • mining and extracting natural resources;

  • oil and gas mining working area;

  • fisheries, livestock, agriculture, plantations, or forestry;

  • construction, installation, or assembly projects;

  • provision of services in any form by employees or other persons, as long as they are carried out more than 60 (sixty) days within a period of 12 (twelve) months;

  • a person or entity acting as an agent whose position is not free;

  • agents or employees of insurance companies that are not established and not domiciled in Indonesia that receive insurance premiums or bear risks in Indonesia; and

  • computers, electronic agents, or automated equipment owned, rented, or used by electronic transaction operators to conduct business activities over the Internet.


Based on the definition, it is clear that the concept of BUT requires three things for foreign taxpayers to be taxed in Indonesia, namely the existence of a place of business in Indonesia, the place of business is permanent and the place is used to conduct business.


In addition, based on Ministry of Finance Regulation number 35 of 2019 on Permanent Establishment, there are five types of PE recognized in Indonesia: Physical PE or property, project PE, service PE, agent PE, insurance PE and e-commerce PE. Physical PE is a PE arising from activities that pass through permanent places such as management premises, company branch offices, representative offices, factories, workshops, and other permanent business premises.


Project PE is PE arising from business activities or activities of foreign taxpayers in Indonesia which include construction projects, installation projects and assembly projects. Construction projects that may give rise to PE include construction consulting services, implementation of construction works and integrated construction works.


Meanwhile, service PE is PE arising from the provision of services by foreign taxpayers or their employees performed within a period of 60 days or more in one year. A service activity is considered to meet the criteria of PE if the provision of services is carried out in Indonesia, the provision of services is carried out to a body or person in Indonesia or outside Indonesia and the employee who provides services is an employee of a foreign taxpayer.


Furthermore, agency PE is a person or entity acting as an agent of a foreign taxpayer with the following criteria: Receives instructions for the benefit of the foreign taxpayer country and does not bear the risk of its own business or activities. However, if the agent located in Indonesia only conducts preparatory or supporting activities, then the agent cannot be designated as PE.


 Insurance PE is a PE arising from a foreign insurance company receiving insurance premiums in Indonesia or bearing risks in Indonesia. However, the provision of insurance PE does not apply to reinsurance companies. This is regulated in article 10 paragraph (2) of the Ministry of Finance Regulation number 35 of 2019.


The next form of PE is e-commerce PE which stipulates that PE arises when there is a computer, electronic device, or automatic equipment owned, leased, or used by an electronic transaction organizer abroad.


Although tax regulations in Indonesia have been quite adaptive in responding to the development of the business world by accommodating e-commerce PE, and various other forms of PE. However, e-commerce PE and other PE still require physical presence in the form of computer equipment, servers, and representative offices. Thus, the Indonesian government and other countries need to update the PE provisions by incorporating the concept of significant economic presence (SEP) as described by OECD (2019) in the BEPS Project.



OECD. (2003). Articles of the Model Convention With Respect to Taxes on Income and on Capital. Paris: OECD. Retrieved from

OECD. (2019). Addressing the Tax Challenges of The Digitalisation of The Economy. Paris: OECD Press. Retrieved from


Related provisions

  • Law Number 7 of 1983 challenges Income Tax;

  • Law Number 7 of 2022 concerning Harmonization of Tax Regulations;

  • Ministry of Finance Regulation Number 35 of 2019 concerning Permanent Business Forms.

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