On October 15, 2026, Morgan Stanley Capital International (MSCI) announced a consultation on a proposal to reclassify Indonesia’s equity market from Emerging Market to Standalone Market. The proposal reflects market participants’ concerns over the transparency of share ownership structures, suspected coordinated trading, and insufficient evidence of progress in enforcing capital market governance reforms. MSCI is expected to announce its final decision no later than June 30, 2027.
Share ownership transparency is relevant not only to investor protection and stock price formation but also to taxation. Ownership information can help identify taxpayers, determine income recipients, and assess compliance with tax obligations arising from capital market transactions and investments. Therefore, discussions on capital market taxation should extend beyond the tax rate applicable to share sales.
Income Tax on Share Sales on the Stock Exchange
Income tax on share sales on the stock exchange is governed by Article 4(2) of the Income Tax Law and its implementing regulations. Under Article 244 of Minister of Finance Regulation No. 81 of 2024, income received or accrued by individuals or entities from share sales on the stock exchange is subject to final income tax at 0.1% of the gross transaction value. The tax is collected by the stock exchange operator through a securities brokerage firm upon settlement of the transaction.
For example, if Company A sells shares worth IDR 10 billion on the stock exchange, the final income tax payable amounts to IDR 10 million. The tax is calculated based on the gross transaction value, rather than the profit or loss incurred by Company A.
This mechanism simplifies tax administration because the calculation does not depend on each investor’s individual gains. However, the tax imposed does not directly reflect the investor’s economic gain. As long as the transaction meets the applicable requirements, final income tax is calculated based on the gross proceeds from the share sale.
Accordingly, changes in share prices or a decline in portfolio values do not automatically eliminate the final income tax obligation on share sales. Assessing the impact of capital market developments on tax revenue requires an analysis of share sale transaction values, trading volumes, and other factors affecting market activity.
Tax on Dividends Received by Foreign Investors
In addition to income from share sales, investors may receive dividends. The tax treatment of dividends differs from that of share sales in terms of the tax base, withholding mechanism, and potential application of tax treaties.
Under Article 26 of the Income Tax Law, dividends paid to nonresident taxpayers, other than permanent establishments, are generally subject to withholding income tax at 20% of the gross amount. A different rate may apply if the relevant tax treaty provides relief and the requirements for claiming the benefit are satisfied.
When applying a tax treaty, the identity of the dividend recipient is an important consideration. The party registered as a shareholder is not necessarily the party substantively entitled to enjoy the income. In cross-border investments, shares may be held through intermediary companies, agents, or nominees. It is therefore necessary to assess whether the dividend recipient qualifies for tax treaty benefits.
Minister of Finance Regulation No. 112 of 2025 on Procedures for Applying Tax Treaties establishes the administrative and substantive requirements for obtaining treaty benefits, including assessments of beneficial ownership, economic substance, and the prevention of treaty abuse.
Beneficial Ownership in Assessing Eligibility for Tax Treaty Benefits
The concept of beneficial ownership is relevant when a party seeks to apply a tax treaty rate to income sourced in Indonesia. Assessment cannot rely solely on documents showing that the recipient is a resident of a treaty partner jurisdiction. It is also necessary to determine whether the recipient meets the criteria for beneficial ownership and other applicable requirements.
For example, Company B in Indonesia distributes dividends to Company C, which is resident in a tax treaty partner jurisdiction. Company C is registered as a shareholder of Company B and claims the dividend tax rate under the relevant treaty. However, if there are indications that Company C acts merely as an intermediary obligated to pass the income on to another party, the tax authority needs to examine the facts, contractual arrangements, fund flows, control over the income, and the company’s operational substance.
If the assessment establishes that Company C does not qualify for tax treaty benefits, the treaty-based rate may be denied in accordance with the applicable rules. In such circumstances, withholding tax must follow domestic law or other valid provisions relevant to the transaction.
However, the use of an intermediary company does not, by itself, establish treaty abuse. Each case must be assessed based on the applicable legal provisions and the facts involved. Similarly, concentrated share ownership or a low free float does not automatically establish that a dividend recipient is not the beneficial owner.
Linking Share Ownership Transparency to Tax Compliance
In its announcement, MSCI highlighted a lack of transparency in share ownership structures. MSCI also referred to several reforms announced by Indonesian authorities, including disclosure of shareholders holding more than 1% of shares, more granular investor classifications, reporting on High Shareholding Concentration, and a roadmap toward a minimum free float requirement of 15%.
Share ownership information can support tax oversight when lawfully cross-checked against dividend recipient data, tax withholding documents, and income tax filings. However, capital market data and tax data serve different purposes and are based on different definitions. Share ownership percentages, for example, are not always sufficient to determine which party controls the use of income or meets the beneficial ownership criteria for tax treaty purposes.
Greater transparency in share ownership should therefore be accompanied by verification and information-sharing mechanisms that comply with the legal basis and authority of each institution. Ownership data can serve as a risk indicator for determining whether further examination is warranted. However, conclusions regarding tax violations must be supported by evidence and the relevant tax provisions.
An MSCI reclassification would also not automatically change the tax rate or tax base applicable to share transactions. Its fiscal impact needs to be assessed by examining changes in trading activity, share sale transaction values, dividend payments, and investment behavior. The relationship between a market reclassification and tax revenue should be evaluated using data rather than inferred solely from MSCI’s announcement.
Conclusion
Capital market taxation involves several mechanisms, including final income tax on share sales on the stock exchange and withholding tax on dividends paid to foreign investors. Each mechanism has a distinct tax base, collection procedure, and set of requirements.
The capital market developments highlighted by MSCI underscore the importance of transparency in share ownership structures. In international taxation, transparency can help tax authorities identify risks and assess eligibility for tax treaty benefits, including compliance with beneficial ownership criteria. However, share ownership information does not replace a substantive assessment of the income recipient and does not, in itself, establish tax avoidance.
The challenge in capital market taxation is to ensure that taxes on transactions are collected in accordance with applicable rules and that cross-border investment income is taxed based on the recipient’s identity, the nature of the income, and the applicable taxing rights. Transparency and information integration, when implemented in accordance with the law, can support tax compliance without conflating capital market governance concerns with tax violations.
Legal References
- Law No. 7 of 1983 on Income Tax, as amended by Law No. 7 of 2021 on the Harmonization of Tax Regulations.
- Minister of Finance Regulation No. 81 of 2024 on Tax Provisions for the Implementation of the Core Tax Administration System.
- Minister of Finance Regulation No. 112 of 2025 on Procedures for Applying Tax Treaties.
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Writer: Ideatax | Editor: Thomas Rizal