Five Important Rules in the Indonesia–Japan Tax Treaty

Five Important Rules in the Indonesia–Japan Tax Treaty

The Ministry of Trade reported that Indonesia–Japan trade reached USD 7.7 billion in the first quarter of 2025, showing a slight slowdown compared to the same period last year.

For context, total trade between the two countries in 2024 stood at USD 35.67 billion, consisting of Indonesian exports to Japan worth USD 20.71 billion and imports from Japan worth USD 14.96 billion. This left Indonesia with a trade surplus of USD 5.74 billion for the year.

As trade and investment ties continue to develop, the governments of Indonesia and Japan rely on a double taxation avoidance agreement, known as a tax treaty, to govern cross-border taxation. First signed in 1982, the treaty has seen few major revisions. Still, there are at least five provisions that businesses and investors should be aware of.

First, provision on income from immovable property. Income earned by a resident of one country from immovable property located in the other country is taxable in the country where the property is situated. Immovable property is broadly defined to include land rights, agricultural and forestry equipment, livestock, mining rights, and other natural resources. 

The treaty makes clear, however, that unlike in the Indonesian civil code, where ships and aircraft may be classified as immovable objects, they are not treated as immovable property under the tax treaty.

Second, provision on business profits and permanent establishments. Corporate profits are taxable in the country where they arise, unless the company has no permanent establishment in that jurisdiction. If a company does establish a permanent establishment, only the profits attributable to that establishment may be taxed by the host country.

Third, dividends paid from one country to residents of the other may be taxed in both jurisdictions, subject to limits. The source country may impose tax at the following rates:

Fourth, interest paid from one country to residents of the other is taxable in the recipient’s country of residence. However, the source country may also levy a tax of 10%, provided the recipient is the beneficial owner of the interest.

Nevertheless, certain exemptions apply. If the recipient is the government, a political subdivision, local authority, central bank, or a government-owned financial institution, the interest is fully exempt from tax.

Fifth, royalties paid across borders are taxable in the recipient’s country, but the source country may also impose a tax of 10% if the recipient is the beneficial owner. Royalties cover a broad range of payments, including those for the use of copyrights (literary, musical, or scientific works), broadcasting rights, patents, trademarks, models, secret formulas, and similar intellectual property.

These five provisions are essential for Indonesian and Japanese investors engaged in cross-border trade and investment. If you need more detailed guidance, Ideatax is ready to assist.