Article 23 Withholding Tax: Dividends, Interest, Royalties, Gifts, Services, and Rent

Article 23 Withholding Tax: Dividends, Interest, Royalties, Gifts, Services, and Rent

In earlier articles, we discussed Article 21 and Article 22 withholding taxes. This time, we turn to Article 23 withholding tax, focusing on its subjects, objects, and applicable tax rates.

The legal basis for Article 23 withholding tax is found in Article 23 of Law of the Republic of Indonesia Number 7 of 1983 concerning Income Tax, as last amended by Law of the Republic of Indonesia Number 7 of 2021 concerning Harmonization of Tax Regulations. 

Broadly, Article 23 imposes tax on dividends, interest, royalties, gifts, awards, bonuses, and similar payments other than those already subject to Article 21, rent, and other income related to the use of assets or compensation for services such as technical services and management. Below is a breakdown of the categories:

Article 23 Withholding Tax on Dividends

Article 4, Paragraph 1, Letter g, of the Income Tax Law (Undang-Undang Pajak Penghasilan/UU PPh) states that taxable income includes dividends in any form, including distributions by insurance companies to policyholders.

However, under the Harmonization of Tax Regulations Law (Undang-Undang Harmonisasi Peraturan Perpajakan/UU HPP), dividends sourced domestically and received by individual taxpayers or domestic corporate taxpayers are exempt from income tax.

As a result, Article 23 withholding tax no longer applies to dividends received by domestic corporate taxpayers.

Article 23 Withholding Tax on Interest

Article 23 of UU PPh also applies to interest, as defined in Article 4, Paragraph 1, Letter f, of UU PPh, which includes premiums, discounts, and compensation for debt guarantees.

Certain types of interest income are exempt from Article 23 withholding, such as:

• Interest paid to banks and pension funds approved by the Minister of Finance.
• Interest paid to financial institutions acting as loan or financing distributors, as regulated under Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK), according to Article 23, Paragraph 4, Letter h, of Law of the Republic of Indonesia Number 36 of 2008 and further regulated in PMK Number 251/PMK.03/2008.
• Interest on deposits, savings, and Bank Indonesia certificates.
• Interest from government and private bonds.
• Interest on savings paid by cooperatives.

In practice, Article 23 withholding tax mainly applies to loans outside the banking system. The withholding rate on interest is 15% of gross income.

Article 23 Withholding Tax on Royalties

The Elucidation of Article 4, Paragraph 1, Letter h, of UU PPh defines royalties as payments made for:

• The use of intellectual property, including literary, artistic, or scientific works, patents, designs, models, plans, trademarks, formulas, processes, and other forms of intellectual/industrial property rights or similar rights.
• The use of industrial, commercial, or scientific equipment.
• The provision of knowledge or information in scientific, technical, industrial, or commercial fields.
• Ancillary or supplementary assistance.
• The use or right to use motion picture films, videotapes for television broadcasts, or sound tapes for radio recordings. 
• The transfer of rights to use such intellectual/industrial property.

Article 23 imposes 15% withholding on royalties. For royalties paid to non-residents, Article 26 applies instead, with a maximum rate of 20%.

Article 23 Withholding Tax on Gifts

Gifts are generally taxable. Their treatment depends on the context. If received by an employee as part of compensation, they fall under Article 21. If awarded through a lottery, they are subject to Article 4(2) income tax. If provided directly in connection with sales of goods/services to all buyers without a lottery, they are not taxable.

Article 23 withholding tax applies to gifts that fall outside the above categories, at a rate of 15% of the gross value.

Article 23 Withholding Tax on Leases

Article 23 withholding tax applies to rental payments for the use of assets, except land and building leases, which are subject to Article 4(2) income tax. 

Additionally, Article 23 withholding tax does not apply to finance leases with option rights, as these are exempt from income tax.

According to UU PPh, the applicable tax rate is 2% of the gross rental amount.

Article 23 Withholding Tax on Services

Services are the broadest category under Article 23. PMK Number 141/PMK.03/2015 concerning Other Types of Services as referred to in Article 23, Paragraph 1, Letter c, Number 2, of Law of the Republic of Indonesia Number 7 of 1983 concerning Income Tax, as amended by Law of the Republic of Indonesia Number 36 of 2008, lists 62 types of services subject to withholding, including:

1. Appraisal services.
2. Actuarial services.
3. Accounting, bookkeeping, and financial report attestation services.
4. Legal services.
5. Architectural services.
6. Urban planning and landscape architecture services.
7. Design services.
8. Drilling services in the oil and gas mining sector, except those performed by permanent establishments.
9. Supporting services in the geothermal and oil and gas mining sectors.
10. Mining services and supporting services other than in the geothermal and oil and gas mining sectors.
11. Supporting services in the aviation and airport sector.
12. Logging services.
13. Waste management services.
14. Labor and/or expert services (outsourcing services).
15. Brokerage and/or agency services.
16. Services in the field of securities trading, except those performed by the stock exchange, the Indonesian Central Securities Depository (Kustodian Sentral Efek Indonesia/KSEI), and the Indonesian Clearing and Guarantee Corporation (Kliring Penjaminan Efek Indonesia/KPEI).
17. Custodian/storage/deposit services, except those performed by KSEI.
18. Dubbing and/or voice-over services.
19. Film mixing services.
20. Services for making promotional materials for films, advertisements, posters, photos, slides, clichés, banners, pamphlets, billboards, and folders.
21. Services related to software, hardware, or computer systems, including maintenance, upkeep, and repairs.
22. Website creation and/or management services.
23. Internet services, including connections.
24. Data, information, and/or program storage, processing, and/or distribution services.
25. Machine, equipment, electricity, telephone, water, gas, AC, and/or cable TV installation services, other than those performed by taxpayers who work in the construction sector with permits and/or certification as construction entrepreneurs.
26. Machine, equipment, electricity, telephone, water, gas, AC, cable TV, and/or building maintenance/repair/upkeep services, other than those performed by taxpayers who work in the construction sector with permits and/or certification as construction entrepreneurs.
27. Vehicle and/or land, sea, and air transportation maintenance services.
28. Contract manufacturing services.
29. Investigation and security services.
30. Event organizer services.
31. Services providing space and/or time in mass media, outdoor media, or other media for the delivery of information, and/or advertising services.
32. Pest control services.
33. Cleaning services.
34. Septic tank emptying services.
35. Pool maintenance services.
36. Catering or culinary services.
37. Freight forwarding services.
38. Logistics services.
39. Document processing services.
40. Packing services.
41. Loading and unloading services.
42. Laboratory and/or testing services except those performed by educational institutions or agencies for academic research.
43. Parking management services.
44. Land surveying services.
45. Land clearance and/or preparation services.
46. Tree planting services.
47. Plant maintenance services.
48. Harvesting services.
49. Agricultural, plantation, fishery, livestock, and/or forestry product processing services.
50. Decoration services.
51. Printing/publishing services.
52. Translation services.
53. Transportation/expedition services except those regulated under Article 15 of UU PPh.
54. Port services.
55. Transportation services via pipelines.
56. Childcare management services.
57. Training and/or course services.
58. Money transfer and deposit services to ATMs.
59. Certification services.
60. Survey services.
61. Tester services.
62. Other services not listed above, provided that the payment is charged to the state or regional budget.

PMK Number 141 of 2015 stipulates that the withholding rate for service payments is 2% of the gross amount excluding VAT.